In Barron's Up and Down Wall Street: At they mentioned my OXY sure wished they mentioned my UCL though.......
JUNE 19, 2000
Up and Down Wall Street, Part 2
........Come this Wednesday, the born-again crude cartel is slated to gather in
Vienna and try to agree on just how much pain (or how little) it wants to inflict
on the rest of the world. The advance poop is that there's a split in the ranks.
The Saudis, operating on enlightened self-interest, are pushing for a boost in
output and ease in the crunch. The Iranians, a pretty misanthropic lot in any
case, are relishing their usual bad-guy role and lobbying to keep production
where it is and, not so coincidentally, keep prices at $32-$33 a barrel (at least),
which would make for a long and very hot summer for anybody who drives.
The Iraqis, now pumping something like three million barrels a day, are being
uncharacteristically moderate. They say they don't care where oil sells at, so as
long it's high enough to allow them to rebuild their weapons of mass destruction
quickly.
It's always possible, of course, that if the Iranians are truculent enough, the
Saudis, to keep the peace, for another few months anyway, will go along with
the notion that the status should stay quo. If so, prices would certainly pop on
the news, maybe to as high as $40 a barrel.
We think, though, that after the obligatory polite bickering, OPEC will follow the
Saudis' lead and expand production, probably by a million barrels a day. And the
reason we think so is simply that Tom Petrie thinks so.
Tom, whose Petrie Parkman firm is as savvy as they come in energy, is on a
roll. He called the original turn in oil, has been on the money ever since and
never wavered in his bullishness, even when crude prices suffered a mild and
temporary instance of vertigo.
Why he expects higher production is that if oil, as he puts it, spends a lot of time
with prices in the 30s -- a lot of time means several quarters -- then demand
will start to soften, which, in the fullness of time, will turn out to be quite bad
news for OPEC. Even the most recalcitrant of its members, reckons Tom, can't
help but see that too much of a good thing can easily become not a good thing.
Should, as he anticipates, OPEC announce plans to lift daily production by, say,
a million barrels, he envisions prices reacting swiftly, dropping through the $30
level, possibly to the mid-20s before steadying. But he doesn't see that as
catastrophic for oil in any shape or form and, indeed, believes it can exert quite
a salutary effect.
For openers, Tom scoffs at the conventional wisdom that oil doesn't count
anymore. Not the least of the reasons, he points out, is that the economy has
slowed in the face of sharp increases in oil and gas prices. Energy, he avers, in
a sense is doing the Fed's job for it, which may explain, he speculates, the more
cheerful note in Mr. Greenspan's latest speech.
Moreover, if OPEC were to keep to its officially sanctioned range of $22 to $28
a barrel, that would be great not only for consumers but for producers as well.
The current curve of the oil market -- backwardation, to use that wretched term
-- in which the further out into the future you go, the lower the price, might
begin to revert to a more normal configuration.
As it is, he observes, so long as cash commands a premium to the future and
that premium grows the more distant the contract, there's a strong disincentive
to carry inventory. That would change and appreciably ameliorate the pressures
on supply, if prices stabilize in the mid-20s, with the prospect of rising demand
gradually nudging them up.
As to the impact on oil shares of an increase in production, they would likely
follow oil prices down. But Tom feels any break would be contained and rather
fleeting. After all, he reflects, at current levels, the stocks are discounting
$20-$21 a barrel, and that low a price just isn't in the cards.
What's more, if OPEC does the right thing, he expects a comfortable, firm oil
market, a perfect environment for the petro producers. We should note, too,
that he's very upbeat, as he has been all along, on natural gas. The old
$1.40-$2.40 band, he says, has given way to a new range of $2.40-$4.
Should oil stocks tumble on news from Vienna, he'd be a buyer of Amerada
Hess (target price: $87); Kerr-McGee ($85); Occidental ($32); and Phillips
($80). And if oil stocks don't go down, those four are still terrific buys. |
