excerpt on oil from barrons:
Q: Is the Middle East less risky now that the war in Iraq -- or at least the declared part of the war -- is over?
A: Judging by the markets, most investors thought that the Middle East was less risky the day the war in Iraq started. Unlike Saudi Arabia, Iraq is still in people's minds. They are said to be pumping 2.1 million barrels of oil per day, but it's more like 1.6 million, 1.7 million. We think they are reinjecting oil back into the fields to keep pressure high. The biggest market concerns are of sectarian conflict leading to civil war, but you aren't going to have absolute civil war in Iraq.
The outcomes that the markets are really concerned about probably are avoidable, because the U.S. is committed to keeping 100,000 troops on the ground and the international community is committed to putting cash on the table. Iraq itself looks considerably better from a market perspective.
It is possible that Iraqi production will hit 2.5 million to three million barrels per day within 12 to 18 months. To get significantly above three million will take much longer, probably five years minimum. That will require new investment, and nobody is developing that right now.
Q: What is your view on the current price of oil? It has been more than $30 a barrel for most of the past two years, which is unusual.
A: We don't look at the demand side. But on the supply side, there is a lot of additional crude capacity that appears ready to come onto the markets. Iraqi production is increasing. Libya wants to expand its OPEC quota. Algeria after its elections is hoping to increase its quota. The markets have been concerned about Nigeria's instability for some time, but it probably isn't as bad as expected. Russia is expanding production by 10% to 15% a year.
Political risk is overly priced into the crude-oil markets. People are concerned about all of these things -- Iran, Iraq, Saudi Arabia, Nigeria, Venezuelan unrest, you name it. Yet one of the reasons the Saudis pushed for a reduction in the production quotas at the last OPEC meeting is that they are concerned that oil prices are going to go off a cliff once we get to warm weather. From the supply perspective, the most likely scenario would be downward pressure on oil prices because of overproduction in the coming year. |
