Oil Price war in the cards?
I personally believe that many here are still too bullish about the OSX near term. We haven't even begun to get into capex cuts or a significant decline in rig count. Yes, the rig count has decreased, but nothing to where it needs to be based on the last downturn to offset our existing oversupply problem. I see OSX 45-50 not far off. Personally, I'm grateful to get a chance to do it all over again. Remember GLM at 8.50?? Or even pre-RIG FLC at 7.50. Ahh, the good old days.
Oil Investors Hum a Familiar Dirge
By Rebecca Byrne
Staff Reporter
11/16/2001 02:56 PM EST
If you're an investor in the energy sector right now, you might be feeling an unpleasant
sense of déjà vu. The last oil price war sent many of these stocks reeling, and with OPEC
now abandoning its supportive stance on prices, there's little reason to believe things will
be any different this time around.
The Organization of Petroleum Exporting Countries agreed this week to cut production by
as many as 1.5 million barrels a day effective Jan. 1, but only on the condition that other
non-OPEC producers cut 500,000 barrels from their own output.
The problem is, Russia doesn't seem
willing to go along with the plan, and
with the cartel hesitant to cut output
alone for fear of losing market share,
analysts say a price war may be in the
cards. That could have disastrous
consequences for the energy sector.
Oil "stocks massively underperformed
the last time this happened," noted
David Wheeler, an analyst at Deutsche
Banc Alex. Brown.
Back in 1997, Saudi Arabia increased
production quotas, perhaps in an
attempt to punish Venezuela for its
overproduction. The strategy backfired as demand slumped following a downturn in Asian
economies and an exceptionally mild winter in the Northern Hemisphere. Between
November 1997 and December 1998, oil prices fell to under $11 from $21. Over the same
period, the Amex oil index fell 8% while the CBOE oil index slid 7%.
Meanwhile, the much more volatile oil service index plunged 63% as major oil companies
slashed capital spending, which cut in half the number of rigs drilling for oil.
Splitsville
With a consensus dissipating between OPEC and non-OPEC countries and demand for
oil unlikely to pick up any time soon, analysts say the energy sector could suffer a similar
fate this time.
"We're at the absolute beginning of the down cycle," noted Michael Young, analyst at
Gerard Klauer Mattison & Co.
The companies with "the greatest relative sensitivity to crude prices," according to UBS
Warburg, include Amerada Hess (AHC:NYSE - news - commentary - research - analysis),
Murphy Oil (MUR:NYSE - news - commentary - research - analysis), Occidental
Petroleum (OXY:NYSE - news - commentary - research - analysis) and, among the
super-majors, ChevronTexaco (CVX:NYSE - news - commentary - research - analysis).
"But it's negative across the board," Young said. "There's no
question that some smaller companies will have to merge as a
result of the destruction to earnings power."
Young estimates that the average oil company will cut capital
spending by 20% to 30% next year.
But other analysts note that most oil stocks have fallen more
than 12% since Sept. 11, suggesting that they may have
already factored in weak energy costs. In addition, some
pundits argue that integrated oil companies have hedged
against future oil prices and that their profits could be protected
through merger cost savings and earnings diversity.
In addition, while oil prices fell sharply in the last price war, they also rebounded
dramatically afterwards, although it took about 15 months for that to happen. Oil prices
went from about $12 per barrel at the end of 1998 to $35 by Sept. 15, 2000. Meanwhile,
the oil service index zoomed 176% from the end of 1998 until its peak on Sept. 15, 2000.
The Amex oil index rose 26% and the CBOE oil index gained 30%.
"Over the short term, lower prices will scare some people and put a crimp in earnings, but
people realize that $15 oil isn't sustainable and that crude oil prices averaged $25 per
barrel over the last decade," said Dan Pickering, director of research at Simmons & Co.
ABN Amro told clients Friday to underweight the group for the near term, but said investors
should add to or establish positions on any major pullbacks. "We advise a market
weighting long term," the firm said.
Ripple Effect for Transports?
And despite the damage to the oil patch, analysts say other sectors of the market could
reap the benefits of lower oil prices, particularly transportation and utility stocks.
"The airlines need all the help they can get, and this will certainly help them in this time of
trouble," said Raymond Neidl, analyst at ABN Amro. "But they have a lot of other
problems, too."
A $1 drop in oil prices translates into a 3- to 3.5-cent reduction in the cost of a gallon of
fuel, according to economist David Swierenga of the Air Transport Association. Crude oil
has fallen about $4 this week alone, which translates into a 13-cent decline and savings of
about $2.6 billion to the airline industry.
In addition, analysts say the overall impact on the consumer should be positive since lower
energy costs generally act as a tax break. The consumer price index revealed that
gasoline prices fell 10.7% in October while natural gas prices slid a record 6.8%.
"Lower energy prices will be a stimulus to growth, saving consumers at least $70 billion
over the next year," said Merrill Lynch economist Gerald Cohen. |
