Okay; how about some positive rational thinking from Merrill Lynch -
... the same guys who downgraded the drillers; so they could be more ''aggressively positive'' in 2H '99... here is why:
*** Oil Industry
An Awful Year Is Over...The Outlook Is Good
Investment Highlights: · The major U.S. based international oil companies have all reported earnings for the final quarter of 1998.
· The stocks of the major internationals have under-performed since last summer. They have, however, weakened even further recently in response to the earnings announcements.
· The stock market's strong negative reaction to the weak quarterly earnings is surprising because the weakness was widely anticipated.
· There were, we believe, certain positive aspects to the fourth quarter results. In particular, the major internationals were able to earn substantial amounts of money despite extremely weak industry conditions.
· The companies are intensifying their efforts to lower costs also a positive development. The upside earnings potential, once industry conditions improve, should be reinforced as a result.
· The weakness in the stocks seems to be implying investor concern that conditions in the oil industry will remain weak for an extended period.
************************************************************************************* (bear trap warning !) - my caps here...
· We continue to believe that the weakness we are now witnessing in the oil industry is TEMPORARY and that the longer-term outlook is QUITE POSITIVE. The corrective mechanism that will boost oil prices is, we believe, already under way. Non-OPEC production is being adversely affected by low oil prices and reduced capital spending and supplies may not rise at all this year.
· In the meantime, if oil price weakness persists for another month or so, we expect that OPEC will act again to lower production.
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· The continuing relative under-performance of the major international oils provides, we believe, an attractive buying opportunity for patient and value-oriented investors.
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crude supplies in the US were 353.2 million boe in May 1998; we've drawn down 19 million + boe; or 6 %. The trend is slow, but it is down. The odds are very good for either total 90% + compliance to current cuts - which will add to drawdowns, or additional new cuts from OPEC. Irregardless of new OPEC cuts; the production cutbacks, shut ins and lower drilling activity has NOT yet shown up in supply numbers; it will and it will be very substantial. Anyone who is using either math, or common sense - knows we will be ''online'' by 2H 1999. If OPEC finds religion and does not cheat upon the realization of $14-5 crude then we are home free to a steady recovery in prices.
Add the Strategic Reserve purchase, even if it is 1/2 of the proposed $300 Million, and we can pull another 12.5 Million BOE out of domestic supply. The domestic supply with the US cutbacks will dramatically overshadow International Supply reductions; alltime low Rig utilization and 30-40-50% Cap Ex reductions in drilling & exploration HAVE to dramatically reduce supply - the world is not coming to an end. Once again; the powerfull equalizer; ''FEAR" will guarantee that those who tread into the ''Valley of The Shadow of Death by 1000 Cuts'' ; will profit most handsomely...
One can either bet on $8 crude based upon NOESIS's ''wishywashy fence jumping mumbo jumbo'' ; or one can use simple math, and factor in conservatively the effect of dramatic cuts in upcoming drilling & production... and perhaps view potential additional OPEC cuts as only ''non-factored'' icing on the cake.
Don't forget the API #'s reflect volatile refiner trends; ie: weeks ago we got a 12 million boe unexpectedly large drawdown; this was spun as year end maintenance, inventory balancing etc. Now that refiners showed a large jump in imported crude (why ?) and show an unexpected (allthough est were for up to - 6-7 m boe) rise in supply the spin can only be bearish - right ? get the point here...?
Foolish to not expect refiners to keeep stocks filled with historically cheap crude. If OPEC announces new cuts - how much more $11-$12 crude will they be able to buy ? If you ran a Grocery Store and the price of Coffee looked like it could rise dramatically in coming months due to a potential producer cutback; wouldn't you buy all the cheap coffee you could and keep your storage/stock room filled to capacity ? - a little common sense here ? The sudden rise in imported crude is due to anticipated OPEC cuts. The sudden rise in imported crude led to the upper end supply increases.
...only time will tell. |
