In today's WSJ, two views of the recent runup. Comments? Thoughts? My question: Assuming that crude oil prices do remain in a trading range of the high teens, what happens to the stock prices of E&P companies?? What would we expect for a RIG, for example? FLC? etc.
Hyperlink if you have a subscription:
interactive.wsj.com
The story:
Crude-Oil Prices Finish
Above $18; Doubts Arise
By STEVE LIESMAN
Staff Reporter of THE WALL STREET JOURNAL
Oil, a centuries-old commodity, is behaving like an upstart Internet stock.
Crude-oil futures prices settled above $18 a barrel for the first time in more than a year, with the nearby June contract closing at $18.18, up 26 cents, on the New York Mercantile Exchange and capping a stunning 60% rise in only two months. Some analysts predicted that $20 isn't far off.
Behind the gyrations are widely divergent theories about the forces influencing oil prices. Just two months ago, when crude hit its low of the year of $11.37, executives of major international oil companies talked of a new paradigm of forever-cheap crude brought on by technology, competition and concern over global warming.
Now, that sounds like distant and specious theory.
"It's all baloney," declared Gary Ross, president of PIRA Energy Group, a New York energy consulting company. "At the end of the day, if the market needs oil, OPEC is in the driver's seat."
The recent rise is based largely on the belief that the industry is heading back to the old paradigm, in which the Organization of Petroleum Exporting Countries controls the market. OPEC members agreed in March to cut world production by two million barrels daily beginning April 1. Mr. Ross and others argue that the oil cartel, under strong financial pressure, has rejuvenated itself by resolving political differences. He expects the cartel to stick to its cutback agreement despite a history of some members not following through. "You have a new OPEC," he says. "This could set the stage for stronger prices, not just for the remainder of this year, but for next year as well."
He sees OPEC increasing its sway over the market, gaining most of the growth in oil demand because the international oil companies have scaled back exploration.
Others disagree. They note that there is no evidence yet to justify the euphoria. Markets won't know officially if member nations have hewed to the cuts until May, when April production data are published. Only anecdotal evidence so far speaks of producers reducing shipments to consumers. World crude inventories remain high, near record levels, and few estimates call for a return to normal stocks before the fourth quarter. "We're ahead of ourselves," argues Peter Fusaro, president of Global Change Associates, a New York-based energy consulting company. "This is all a perception play."
Worse, 400 million barrels of oil remain unaccounted for in global inventory data. The number is a potential statistical anomaly, but the crude may have been produced and could come flooding back into the market to wash out the rally.
Mr. Fusaro is one of a number of analysts who holds that the industry has really changed and that the current rise is just a blip in a long, steady decline. Competition from natural gas and deregulation of oil exploration throughout the world, Mr. Fusaro argues, have created a new environment in which oil prices will be under constant pressure.
Roger Diwan, president of Petroleum Finance Group, a Washington-based consultancy, says those factors will lock oil into a trading range of $14 to $17 a barrel. Prices below that level give OPEC members incentive to reduce production; prices above the target brings more non-OPEC oil into the market and offer irresistible temptation for OPEC members to increase their output beyond quota levels.
That incentive has grown with the recent cutbacks. The reductions have idled more than six million barrels a day of global capacity, almost 8% of the total. The idle capacity only guarantees volatility, Mr. Fusaro says, with the potential for renewed production growing as prices rise.
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