here's an interesting story.
amcity.com
September 7, 1998
Opinions vary on outlook for oil price slide
Ann De Rouffignac
In September of 1997, oil was nearly $20 a barrel and oil companies were raiding each other's staffs to find engineers and geologists. Companies were passing out retention packages to keep key people, and salaries and signing bonuses were on the rise. The energy economy appeared stable if not robust.
But what a difference a year makes.
During 1998, all that has changed. Early this year, oil prices fell to the low teens, and stocks of many oil and oil service companies plummeted in value.
Today, despite the effort by the OPEC member states to cut back production to control the oversupply of oil, prices continue to hover in the $13 a barrel range. Some major mergers have been announced and are certain to mean layoffs, and there is talk of layoffs at some other major oil companies as well as independents, sources say.
Smaller companies predominately in oil are facing cash flow squeezes, and capital budgets throughout the industry have been cut.
What happened to upset the oil price from its decade-long trading range of $17 to $22 a barrel is fairly clear. Most analysts agree that an untimely increase in production of oil by OPEC at the end of last year, coupled with the unforeseen economic collapse of Asia and a mild winter in the U.S. ganged up to clobber the oil price.
In response, however, the OPEC member states announced two rounds of production cuts, one in mid-spring and the other at the end of June. The market didn't put much faith in the ability of these countries to carry out the announced cuts, and demand for oil kept slackening as the economic crisis deepened in Asia drawing in Japan and now China. Huge inventories of oil continued building. Adding to the problem of late is turmoil in Russia which may cause even more oil to be dumped on the world market.
Today, the question of how much longer this $13 a barrel price will persist and what's in store for the next two years is the talk of the energy community. Houston-based analysts and experts have wide-ranging opinions about what to expect. What follows is a roundup of those perspectives.
C. Van Levy, Jefferies & Co. Inc. -- Levy says the oil commodity market in the near term is being driven mostly by a pessimistic psychology.
Even though the market is a supply game, traders react as if the OPEC member states will not comply with the announced production cuts, he says. On top of that, the Asian economic crisis and problems in Russia contribute to a poor outlook.
"Common sense says there will be another round of cuts by OPEC," Levy says. "By the first quarter of next year, the price will be back to $18 a barrel or at least constructively moving towards that price by the second quarter of next year."
As for the rest of this year, it will stay around $13.40.
Levy ignores talk about the price falling through the floor. He attributes that to short-sellers of stocks who are betting the price of both oil and the stocks will continue to fall. (Short-sellers borrow certificates at one price sell them and then repurchase the stocks at a lower price. Then they return the certificates to their original owner. The spread between what the short sellers sell the certificates for and then repurchase them is their profit.)
"The reality is bad," says Levy. "But not as bad as you think."
Ken Sill, CS First Boston Corp. -- Sill sees oil prices trading up to $16 a barrel by the end of the year -- if OPEC meets the second round of cuts. But next year the market will be choppy at first gradually improving by the end of the year, resulting in an average price of $17 a barrel.
"If they (OPEC) don't fix it, there will be political turmoil in these countries," says Sill. The price has stayed in this $17 to $20 a barrel range for the last decade, he notes.
The question of how the current turmoil in Russia will affect world oil markets is still unknown. Sill suggests that internal demand for oil in that country will continue to fall, pushing more oil into export and exacerbating the oversupply problem. All this contributes to the current negative market psychology, he says.
However, Sill adds that a fairly quick price turnaround is possible when the Asian countries stop liquidating oil inventory and start buying oil again.
"We are fairly optimistic," says Sill.
Vic Hughes, CIBC Oppenheimer -- Hughes sees a very uncertain market for oil, but still comes down on the optimistic side. For the rest of 1998 he sees the price coming up to the $15 to $16 a barrel range and for 1999, the price should be around $18 a barrel.
"The market is treating the price of oil like we will never burn another barrel of oil again," says Hughes. "We are not going back to houses lit by candles or the horse and buggy. Modern civilization will go on and we will continue to live in houses and drive Suburbans to work."
However, Hughes cautioned about any oil price forecast from analysts.
"If I knew what oil prices were going to be next year, I'd be sitting on a beach in the Bahamas calling in my order," he quips.
Dave Pursell, Simmons & Co. -- Pursell sees current $13 prices continuing for the rest of the year absent any kind of "geopolitical" event.
"But for 1999, the picture gets rosier," Pursell says. "Demand will start increasing again and weather will play a role. The system is tighter than people think."
Pursell expects a "real" winter this year will help draw down inventories. He notes that last year's mild weather contributed significantly to the inventory overhang that brought prices down.
Weather coupled with demand picking back up in Asia, will produce prices trading in the $18 to $20 a barrel range for next year, he says.
J. Marshall Adkins, Raymond James Inc. -- Adkins sees inventory levels coming down and prices heading up for the near term.
"Everyone assumes they (OPEC) won't comply," says Adkins. "Historically, OPEC is better at controlling supply and prices than people give them credit for."
He notes a lag between announcement of cuts and the effect on inventories of oil and expects an impact from the second round of cuts announced earlier this summer to be felt in the upcoming weeks.
Adkins sees the price coming up to $17 to $18 a barrel by the end of October.
"The bet here is OPEC will make the cuts," he says.
Next year, the market will be volatile, but the price will average about $16 to $17 a barrel. As the price comes back up, the temptation to cheat on quotas and production cuts will be very tempting for some OPEC members, Adkins says.
Adkins also notes there are wild cards that could rock any price forecast. Just how far the Asian and Russian problems will go towards impacting other econom-ies is still unknown. There's still a lot of uncertainty about whether a world recession is shaping up or not, he says.
On the other hand, there are other wild cards that could send the price up in a heartbeat that the market is no longer taking into account.
"The market assumes no disruptions of supply," he says.
Bill Gilmer, Federal Reserve Bank of Dallas -- The senior economist and policy advisor for the Houston branch isn't optimistic that OPEC will be able to reduce the supply enough to get the price back up anytime soon.
"I'm not optimistic about those cuts. They won't add up to what's advertised," he says.
Gilmer sees the price staying around $13 to $14 a barrel for the rest of the year. By the beginning of 1999 with the weather helping, prices may be back to $15 to $16 a barrel.
"It looks pretty bleak right now," says the economist. "There are problems for OPEC and there's so much oil in inventory."
Gilmer notes that the collapse of the Asian economies knocked the wind out of the growth in demand for oil. More than half of that increase was coming from these countries that are not going to recover anytime soon.
But Gilmer doesn't see a long term recession beginning like in the 1980s.
"The Saudis won't flood the market like they did the other time, and even the Venezuelans have learned their lesson somewhat. I don't see the floor dropping out of this market."
He said he would like to revisit all the data at the end of the year, however.
"If I could forecast oil markets, I would not be working here." he said.
Ken Miller, Purvin & Gertz Inc. -- Even more pessimistic about the near term, Miller says there is not enough demand to absorb all the supply.
"The basic outlook is extremely weak until the next decade," says Miller. "The main reason is the Asian problem and now we might begin to see an impact from Russia as they begin to export more oil as internal demand gets even worse."
Miller has little faith in OPEC to cut production enough to draw down the huge inventories of oil in the world. Miller suggests OPEC should reduce its total production of oil even more.
Prices for the rest of the year will be $13 to $14.50 a barrel, assuming OPEC is able to rein in production, Miller says. Next year, the price will average about $15.25 during the year.
Miller sees oil prices improving beginning sometime in 2000 and really picking up by 2001, when world demand finally bounces back and oil inventories are finally drawn down.
"We're looking at the worst of the problems this year. Then it will stabilize in 1999. and beginning in 2000 it will pick up," says Miller.
"This is a two-year dip rather than a five or six year one like in the '80s. The basic underlying growth scenario is still good."
Nizam Sharief, Hornsby & Co. -- Sharief sees oil prices staying around $13 to $15 a barrel for the rest of the year and not improving much next year either.
Whether this is bad news or good news depends on who you are, he says.
"If you are a consumer, happy days are here again," he says. "If you are an oil producer, it's another story."
Sharief says inventories started building after OPEC increased its production quota late last year.
"The timing couldn't have been worse. Demand started slackening off and the Asian crisis hit," he explains. "Inventories started building."
But Sharief is not so optimistic that the inventory building will quit anytime soon. In the fourth quarter he expects inventories to be drawn down somewhat.
Several things contribute to this scenario, he explains. First OPEC has little "appetite" to make more cuts. Second, the economic crisis won't go away, and Russia's travails just add to it. Third, the oil companies can still make money at $13 to $15 a barrel, so they will continue to explore and produce.
"We will hang around $13 a barrel for a while and there's not much optimism for 1999 either." |
