This article in the WSJ strikes me as pure fodder to fill the paper.
I find it particularly interesting that an analyst would make such a remark as this and offer no reason for feeling this way:
"I find it difficult to accept [that] OPEC will be able to hold pricing up over time after so many years of not doing so," says Lawrence Tedeschi, an analyst with Banc One Investment Advisors."
Or, how about this;?
"But while oil prices seem to have stabilized a bit lately, it might be too soon to declare victory. For most OPEC nations, more than half of their gross domestic product is tied to oil, so stability depends on increasing petroleum revenue, even if it means pumping more crude."
While the last statement is certainly true, the implication that OPEC has to increase production to maintain (or grow) revenues, is unfounded. OPEC has a simple decision to make and it will be a self serving one. Does it prefer to sell 95% of its production capability at, say $25, or does it prefer to sell 90% at $27? The latter produces more revenue and depletes fewer assets.
So, as I like to insist, "as long as OPEC doesn't turn stupid" the price will remain comfortably in the $mid-high $20s. Yes, I recognize that world demand may slow and that it may slow more that it would if oil prices were kept high but, there is one inescapable fact that remains- most of the oil (no, not all) is consumed regardless of price and that price will be paid even if spending on something else has to be reduced. While I don't pretend to know where that inflection point actually is, I can say this as an example: I'll be they could sell 80% of their production at $40 if they didn't mind the backlash that it created.
What is also painfully clear to OPEC is that uncontrolled production is the recipe for $10 oil. So, I have confidence in them cutting back as needed to get the price that they "need". And, until non-OPEC marginal production can influence that price (not for years, IMO), it's game set and match for their team ("as long as they don't turn stupid").
Morgan Stanley put out a piece a couple months ago that addressed the huge discounts in E&P valuations compared to the forward price of NG. That theme was re-iterated this week and they suggest that the group is being priced as if NG will be $3/mcf again, soon. That makes no sense to them, in light of the 5 year strip being $4.50+.
Makes no sense to me either and that's why I'll let the fundamentals drive this some of the group's valuation higher. Not all, will benefit because many are fully priced but, you each have names that are cheap even if adjusted for their various shortcomings.
Their utility analyst team suggested that 120-140,000MW of new generating capacity will be added over the next three years. The energy team analysts decided to use a very conservative estimate of only 80,000MW. This will increase NG demand by at least 1.2-2.0Bcf per day PER YEAR until 2004. That is an average increase of 500 Bcf per year. |
