Enjoy all..... Top Stories: Oil Prices Keep Tumbling, and Sentiment Remains Fragile
By Mavis Scanlon
Staff Reporter
Even after a spate of recent good news, investors in the oil patch are frowning once again. The culprit: stubbornly low oil
prices.
On Monday, light sweet crude for April delivery tumbled 71 cents to $13.35 per barrel, well below the low of $13.75 hit in
December 1993. The prospect of OPEC taking some action to cut overproduction bolstered futures trading to a small
degree over the past two weeks, but all bets are off now that OPEC's Ministerial Monitoring subcommittee meeting has been
pushed back to March 30. In addition, Saudi Arabia and Venezuela, OPEC's largest producers, pumping roughly 32% and
10% of OPEC's production, respectively, are locked in a dispute over who should cut production.
That dispute over supply has overshadowed recent good news among oil drilling and service stocks. Global Marine
(NYSE:GLM - news) , which two weeks ago announced a contract commitment for an ultra-deepwater drilling rig,
announced that it had reached an agreement to build another rig at a similar day rate. That news comes on the heels of
Halliburton's (NYSE:HAL - news) $8 billion acquisition of Dresser Industries (NYSE:DI - news) . Initially the oil
services stocks rose on the merger and building news. But the persistent drumbeat of falling oil prices is crushing the smallish
positive resolve.
"Over the weekend the sentiment shifted," says Victor Yu, a vice president at commodity broker Refco. "OPEC still has its
work cut out for it. They are still trying to get all their members together."
For now, Yu says, the Saudis haven't said whether or not they will attend the meeting. "They could be letting oil prices slip a
little more," says Yu. "The last thing they want to do is give up market share." In European markets, the international crude
benchmark Brent blend fell 19 cents to $12.57 per barrel on Monday.
The market has been in a downtrend for four months now, says Edward Kevelson, a vice president at Paribas Futures, so
Monday's drop is nothing new to him. "No one is concerned about the upside when there's more oil than meets demand.
We're still in an end-game," he says, referring to the dispute between Saudi Arabia and Venezuela. There are "two egos
fighting it out and no one has blinked so far."
Estimates on how long prices will remain depressed range from two months to 24 months, barring OPEC action. The
standoff between Saudi Arabia and Venezuela must be resolved before crude prices firm up. Venezuela, whose new
production quota after the November agreement on a 10% production hike is 2.6 million barrels a day, produced about 3.3
million barrels per day in February, 727 million barrels over their quota, according to a recent research report by Goldman
Sachs. Nigeria, Qatar and Iraq were also producing above their quotas. Saudi Arabia pumped 8.7 million barrels, slightly
under their "new" quota of 8.76 million barrels. A move to cut production by OPEC or a huge gasoline season are about the
only things that could stabilize crude prices, says Kevelson.
The drop is creating buying opportunities for those who believe in the long-term outlook for the energy sector, however.
While Jeanne Mockard, manager of the $215 million Putnam Global Natural Resources fund, says she can't call the bottom,
she notes that the next move from here is in a better direction. Iraq's new quotas, decreased demand from emerging markets,
warm weather and no imminent military strike against Iraq are all already discounted in the sector's stocks, she says. She sold
off a lot of her energy holdings when oil hit the $27-per-barrel mark, and has been slowly moving back into an overweighted
position in oil stocks since crude began its decline. She likes companies like Atlantic Richfield (NYSE:ARC - news) , Elf
Aquitaine (NYSE:ELF - news) ADR) and Kerr McGee (NYSE:KMG - news) .
One of the reasons for drops in crude is the short time frame in the futures market. Typically, the futures market focuses on
contracts about a two to three months out, says Yu at Refco. Looking much further out, traders are valuing crude at more
amenable prices, indicating the present softness may be short-lived. Crude oil for December 1999 delivery, for example,
closed at $17.26 on Friday.
Oil companies have to make plans and secure rigs for future drilling programs, and typically may work with a wide range of
oil prices. In discussing his company's latest contract announcement, Dave Herasimchuk, vice president of marketing at
Global Marine, says that Global, as well as most of the industry, is now convinced that lower prices is something they will
have to live with for most of 1998, but he seriously doubts it will last into the new year. So, he says, his company as well as
Exxon are "both going ahead with our investment plans."
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