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Strategies & Market Trends : Investment in Russia and Eastern Europe

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To: Z Analyzer who wrote (863)	12/3/1998 7:58:00 PM
From: Rob Shilling	Read Replies (1) of 1301

Z Analyzer, still holding that LUKOY stock ?? I am, hang in there we knew it would be a rough ride. OPEC should really be in the driver's seat. The press talks about how OPEC can't "agree" on things, but right now nobody is making much money pumping oil except OPEC. Since the oil price drop has lasted almost a year now and things are so bearish right now, I think OPEC is getting a lot of mileage out of its pain. My thinking is that we are probably getting some long term damage to the world-wide oil industry. Lots of marginal producers are probably cutting production and some may be going out of business. Also, the drilling activity has gotten so bad that the world will be ill-prepared for the continued increase in demand. My guess would be that after enough pain has been exacted on the higher cost producers in the world, OPEC will get the prices back up by cutting more. However, my theory is that Non-OPEC production cuts may actually turn prices around by themselves (the best case for OPEC). Anyway, demand vs. actual supply (counting full capacity production by OPEC) is only 4 million bpd now (it was 15 million bpd in 1990). Demand is around 75 mbpd. OPEC is cutting back 2.6 mbpd now and the actual storage drawdown is 2.5 mbpd. Those numbers mean to me that once the world is no longer deemed "awash in oil", OPEC could stop cutting and meet demand almost exactly. Then there would be only 4 mbpd potential extra capacity in the world, and demand is increasing every year !!! The increases in demand will be at least 1 mpbd next year. That gives us a 3 mbpd extra capacity. The kicker is that Non-OPEC production (especially non-government, non-OPEC) has to be cutting back right now and may permanently be damaged or be very slow to come back with higher prices. That means that the 3 mbpd extra capacity in the world could shrink even further. Richard Rainwater (billionaire investor) points to the next century to be a century of "resources". He expects oil prices to go up above the historical $20 per barrel level after January of 2000 for basically the reasons I am showing here -- Lots of demand and a small margin of excess capacity. With the major reduction of drilling ahead of this potential energy shortage, we are more likely than ever to see a big spike in prices as we get closer to 2000.

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