One real cartel: OPEC walks fine line
By Thom Calandra, CBS MarketWatch
Last Update: 4:33 PM ET Sep 20, 1999 More StockWatch
Commentary New!
SAN FRANCISCO (CBS.MW) -- This is one real cartel, just like the old days.
9/20/99 4:00:22 PM ET
Oil's (CL=V9: news, msgs) good fortunes, thanks to OPEC, have made shares of oil drillers, oil technology companies and explorers among this year's best U.S. stock performers. The October crude oil future in New York, the market's most active, fell 1.7 percent Monday to $24.29 a barrel.
"The market should try and test the psychological level of $25," strategist William Noble at www.markethistory.com said. (Europe's counterpart, North Sea Brent crude, sells for about $22.80 a barrel.)
As ministers from the Organization of Petroleum Exporting Countries gather at their Vienna headquarters on the Danube river this week, investors are wondering whether crude oil's amazing rally will continue. The price of a barrel has doubled since February. On Monday, shares of oil drillers and other petroleum service companies fell 4.3 percent in the U.S. stock market as investors bit their fingernails, waiting for the news from the blue (Danube) in Vienna.
OPEC, for much of the 1990s a meaningless mess, has stuck to its production cuts, effectively preventing about 6 million or so barrels of oil a day from reaching the marketplace. The organization, which controls about two-thirds of the world's oil exports, is draining the excess supplies that sent oil prices reeling in 1998. Can oil's good times keep rolling?
The organization's ministers are walking a fine line.
The New York futures market took oil prices as high as $24.85 a barrel last week. "We still believe that crude has the potential to go a lot higher at some point, but we are worried about the OPEC meeting," market analyst Phil Flynn at Alaron.com told CBS.MarketWatch.com.
This week, some say, OPEC must demonstrate that it will continue to maintain a stern handhold on supplies through April. Indeed, some would argue that oil's explosive rally requires even more cutbacks from the group this week.
Two sides of equation
That probably won't happen. "We don't want any change at this meeting," Venezuelan Oil Minister Ali Rodriguez told Reuters. "I won't be completely happy until I see real price stability."
On one side of the equation, the world has too much oil slopping around the world, even amid a recovering Asia economy. Any sign of OPEC weakness would send oil prices tumbling -- in that view.
On the other side of the equation, the world has a recovering Korea and Japan, a booming United States and steady demand across Europe. (Latin America right now is a wild card.) Continued restraint by OPEC, in an OPEC marketplace that consumes about 75 million barrels of the stuff a day, could cause a repeat of the oil crisis of the mid-70s, when a barrel cost as much as $50 or so.
The Center for Global Energy Studies' monthly oil report in Britain said OPEC must raise output to prevent a shortage of oil supplies during the winter. See Futures Movers.
In the United States most investors wonder whether oil-service stocks and other oil investments on paper will continue to thrive. See our StockWatch report on this. Much has been made about surging oil-service stocks, which since March have almost doubled in value as a group. The Philadelphia Stock Exchange's Oil Service Index ($OSX: news, msgs) sells these days for 82.62 after hitting a 47.40 low on March 1 of this year.
The oil group was getting roughed up Monday. The nail-biters, one eye on the Wednesday OPEC meeting in Vienna, hit the small and medium-sized oil-service stocks hard. Among the giant refiners, only shares of Phillips Petroleum Corp. (P: news, msgs) gained 5 percent Monday after more speculation about a Phillips merger with much larger Chevron Corp. (CHV: news, msgs).
One-month chart of Global Marine, Baker Hughes
What does the near future hold? Oil-service companies such as Global Marine (GLM: news, msgs) have been reducing the number of their drilling rigs and slimming their work forces. Even if oil slides back to $20 a barrel, the companies, many of them in Texas, are likely to raise Wall Street's eyebrows when profit reports stream in later this autumn.
Stocks strategist and CBS MarketWatch columnist Roy Blumberg says his favorites include Nabors Industries (NBR: news, msgs), Grey Wolf (GW: news, msgs), Global Marine, Baker Hughes (BHI: news, msgs), Halliburton (HAL: news, msgs) and Schlumberger (SLB: news, msgs). "All of these companies should be able to exceed earning levels reached at the last peak in the cycle in 1998," Blumberg says. "This should push their stock prices to about their 1998 highs in the next 12-18 months."
Added Walter "Bud" Haslett, a market maker in the Philadelphia Oil Services Index, "Once the stocks post a couple of good quarters of earnings, they will become institutional favorites and should approach their old highs."
Alas, another commodity, gold (GC=Z9: news, msgs), faces a European test this week. The Bank of England will hold its second auction of the metal in London. Demand for the metal was so weak at the first one, gold prices sunk to $250 an ounce. That's a 20-year low. See Futures Movers.
The auction is Britain's attempt at cutting its gold holdings in half. Many of the world's central banks are distancing themselves from gold. The Bank of England will try to auction about 25 tons on Tuesday. Britain this spring said it would sell 415 tons of gold from reserves of about 715 tons, then take receipt in major currencies such as U.S. dollars, the euro and Japanese yen.
Oil, thanks to first to OPEC's disorganization and now its firm resolve, hit a 22-year low, then recovered in vigorous fashion. Thus far on the world stage, no organization has stepped forward to champion the precious metal's cause.
Cartel, anyone?
|
