Amigos, here's a good article on the oil price situation and the link to subscribe to this free newsletter:
*******************************************************
* Brought to you by: Microsoft Outlook 98 *
* microsoft.com *
*******************************************************
For an enhanced HTML version of the Money Daily,
visit moneydaily.com.
Tuesday, March 24, 1998
International producer agreement boosts oil prices
Here's what it means to your investments, your mortgage and
your price at the pump
by Michael Brush
Oil prices bounced to over $16 Monday -- from below $13 just
last week -- on news of an unprecedented global agreement to
cut production. The deal between Saudi Arabia, Venezuela and
Mexico was unusual because it was the first time OPEC members
had gotten together with producers outside the cartel (like
Mexico) to join hands and cut production.
Naturally, the agreement has broad economic implications.
Gas prices, your investments, and even your mortgage could be
affected. But it won't be clear just how much until the
terms of the deal are clarified. Right now, for example, it
appears that oil prices are likely to say higher, but there
are questions about how high they'll go.
It is hard to say in part because there is a lot of confusion
over what countries are really involved, and how much each
one has decided to cut production.
Jim Placke, director for Middle East research at Cambridge
Energy Research Associates in Washington, D.C., estimates
that when all is said and done, output will be cut by about
1.5 million barrels a day (bpd). That's a lot less, in other
words, than the 2 million bpd cut the markets were pricing in
on Monday. And it wouldn't be enough to balance supply and
demand. "The excess was about 3 million barrels a day," notes
Placke. "If they cut half of that, the fundamentals still
imply an ample supply of crude."
Demand, for example, is still weakening because of warmer
weather and the Asian economic slowdown. What's more, by the
end of the year Iraq will likely be selling about 700,000 bpd
more than it is today, Placke estimates. And even if the deal
turns out to be a firm agreement, oil analysts point out,
OPEC members have a habit of cheating.
In short, there are a lot of forces working against any big
uptick in oil prices. At the same time, don't expect prices
to slip back under $13 a barrel. The reason is simple. At
those prices, oil producing countries were really beginning
to feel the squeeze. "We began to sense a panic last week
among finance ministers in oil producing countries around the
world," says Placke. Governments in several oil producing
countries recognized they might risk social upheaval unless
something was done, says Placke.
So the bottom line is this. Even though it is unclear where
oil prices will eventually settle, they are going up. And
here is what you may want to do about it.
* Enjoy the lower gas and oil prices while they last. "The
falling price of oil was better than any tax cut Washington
could give you because it went right into your pocket
immediately," says Robert Froehlich, chief investment
strategist at Scudder Kemper Funds. But now the party may be
over. "Most gas stations don't need a good excuse to raise
prices at the pump, and I can guarantee that we have given
them all the fodder they need." Some economists argue,
though, that even the $16 a barrel oil prices of a few weeks
ago had not yet flowed through to the pump -- implying that
retail prices won't really go up that much. Any increases
should take a while to show up, since much of the inventory
being drawn down right now was bought at very low prices in
the wholesale market. "If everyone plays the game properly
we won't see increases for a few weeks," says Placke.
* Use the oil stock rally to lighten up on holdings in the
industry. "The agreement has little credibility," says
Benjamin Rice, an oil analyst with Brown Brothers Harriman.
"All it did was drive up the oil stocks. People ought to
lighten up their holdings. That is what I am advising."
* Don't jump into airline stocks just yet. Airline shares,
which are highly sensitive to the price of oil, got spanked
on Monday. But that doesn't make them a bargain. Given that
they have come up so much in the last six weeks, Independence
Investment portfolio manager Paul McManus reckons you should
wait for another 5% pull back from Monday's levels. McManus,
who specializes in airline stocks for a fund he runs for John
Hancock, says the fundamentals still look good for the
airlines industry. And like the energy analysts, he has his
doubts about this agreement and whether it can really drive
oil up much higher.
* Don't rush to refinance your mortgage. Anyone who remembers
the late 1970s and early 1980s automatically associates
higher oil prices with the possibility of a sharp uptick in
inflation and interest rates. But what happened over the
weekend probably won't cause that. So if you still haven't
refinanced that mortgage, you don't need to drop everything
and get it done tomorrow. "This won't have an impact on
inflation," says James Paulsen, the chief investment officer
at Norwest Investment Management. "It will just come down at
a slower rate." Fannie Mae chief economist David Berson
agrees, because he says the big drop in oil prices last week
was never factored in to current interest rates and inflation
levels. |
