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To: BigBull who wrote (71211)8/19/2000 5:57:27 PM
From: Tomas  Read Replies (2) | Respond to of 95453
 
The market's been wrong about oil before
Donald Coxe
National Post, August 19

With global stock markets once again strong after spring swoons, price-earnings ratios are back to lofty levels. Major indexes trade at multiples far above historic norms, reflecting the strongest global economy on record amid muted inflation.

When strategists and economists muse about threats to this near perfect climate for bonds and stocks, they routinely mention the threat of inflation from oil prices. To them, US$25 oil is a nuisance, US$30 oil an anathema, and the thought of even higher prices a nightmare. It is as if they were all drivers of gas-guzzling SUVs and considered it their god-given right to fill the maws of their voracious pets for US$20 or less.

That disdain for the oil industry extends to the valuation of oil shares. The oil industry globally has the greatest profit gains this year of any major group, yet its shares sell at modest valuations.

The market has had it wrong about the prices of oil and oil stocks for 18 months. The long mistake began with a sensational thinkpiece. In February, 1999, with oil prices below US$11, the prestigious Economist magazine ran a cover story predicting US$5 oil. That proved to be one of those cover stories investors associate with Business Week ("The death of equities" and "The death of bonds" just before historic bull markets in those assets were born).

Ironically, the article was so persuasive that it shocked the oil ministers of Mexico and Norway. They had always refused to join the Organization of Petroleum Exporting Countries, but the prospect of US$5 oil overcame their fear of being labelled demonic price-fixers. They cut a production-cutting deal with Saudi Arabia that made them visiting members of the club. Meanwhile, oil demand globally had begun to soar above industry forecasts as Asia recovered from its deflationary collapse. By September, Asian demand was 790,000 barrels per day above predictions, and OPEC's production was down 2.8 million bpd. Result, oil prices were at US$24.

Economists dismissed the run-up as a temporary aberration. Nor were they alone in their skepticism. Drilling for new oil continued to decline globally despite a doubled price. The oil industry had been so traumatized by the prospect of US$10 oil (let alone US$5) that it slashed its exploration budgets and refused to change them even as oil entered one of its greatest bull markets.

Natural gas prices were also leaping. That cutback in exploration hit gas exploration at a time when U.S. demand was climbing. In part, the demand was weather-related: 1999 was a hot summer, the kind that convinces otherwise rational people that global warming is for real. In part, the cause was shrinking supplies from the Gulf of Mexico: The production profiles of wells there has been disappointing; they start out running strong, but fade like out-of-shape joggers. The U.S. industry has not replaced its domestic gas production for five years, and that kind of attrition eventually produces a squeeze. Result: While oil was levitating from US$10 to US$25, gas was ballooning from US$1.80 to US$3.

Even a near record warm winter and a near record cool summer haven't driven natural gas prices down, and only the onset of large-scale deliveries from Canada has kept them from climbing above US$5 this year. Demand is rising from the electrical generation industry, as new entrepreneurs rush in to build gas-fired plants to replace output from ageing nuclear plants closing in response to rabid environmentalist coalitions.

As if mega-boosts in oil and gas prices weren't enough for the oil industry, even the sad-sack refining and marketing divisions of the U.S. integrated oil companies are showing rising margins.

How good is it when everything goes right? In the second quarter, per share earnings were up 128% at Exxon-Mobil Corp., 67% at Royal Dutch/Shell Group, 174% at USX Marathon, and 128% at Texaco Inc. Canada's Suncor Energy Inc., which is listed on the New York Stock Exchange, announced second-quarter earnings up a mere 255%.

Nothing on the horizon suggests a coming collapse in oil and gas prices. OPEC is pumping more oil, but wants to ensure prices don't break US$25. A normally cold winter should produce record prices for heating oil and gas. The oil stocks have performed well, but not in line with their profits.

The consensus is still wrong.

nationalpost.com



To: BigBull who wrote (71211)8/20/2000 1:40:27 AM
From: Douglas V. Fant  Respond to of 95453
 
Big Bull, And an update on the Sudan, where IMO the war between the Arabs and the Africans is growing more savage...Do not be lulled into investing into any of the companies holding oil concessions there anytime soon....

KHARTOUM
THE ECONOMIST
August 19th - 25th 2000

Omar Bashir, Sudan's president, is pursuing a charm offensive. Tell that to the southerners, or indeed to the United Nations

BOMBING United Nations aircraft that are delivering emergency aid is a weird way to pursue a charm offensive. It led the UN's Operation Lifeline Sudan to suspend relief flights to hundreds of thousands of people affected by Sudan's civil war. Each flight had taken place with the knowledge and permission of the government, but it still sent its air force to attack the UN planes as they unloaded food and medicine at rebel-held airstrips in southern Sudan. Luckily, none was hit, and flights resumed a week later, on August 16th. But what did the government in Khartoum think it was doing?

Sudan has been remarkably successful in breaking out of diplomatic isolation. Not so long ago, it was shunned as a "rogue" state and surrounded by enemies.
The UN imposed sanctions after Sudanese agents attempted to assassinate Egypt's president, Hosni Mubarak, in 1995. Accusing Sudan of supporting terrorism, America imposed further sanctions, and gave military help to its neighbours. Those neighbours then passed weapons to the Sudanese rebels. Most sub-Saharan African governments also supported the rebels, and most Arab governments spurned Sudan for backing Iraq in the Gulf war, let alone for preaching Islamic militancy. One of the world's poorest countries, it got no international aid; the IMF suspended its membership in 1993 for its failure to pay interest on its debts.

In the past two years, luck and diplomatic skill have enabled Sudan to wriggle out of this cage. Two of its most hostile neighbours, Eritrea and Ethiopia, went to war with each other. A third, Uganda, became embroiled in the war in Congo. All three have sought peace agreements with Sudan. The IMF lifted its suspension a few weeks ago. The American government, though still deeply divided about how to handle the country, is reopening its embassy in Khartoum. European countries, keen to take commercial advantage of Sudan's new oil industry, have beefed up their embassies and toned down their criticisms.

And just about everyone was delighted in December when Hassan Turabi, Sudan's leading Islamist and the virtual co-ruler with President Omar Bashir, was pushed out of government (see article). The Egyptian regime, endlessly nervous about Islamist militancy, was particularly enthusiastic, and is now trying to get the UN sanctions lifted, and to secure Sudan a seat on the Security Council later this year.

At home too the government seems to be doing better. Northern politicians who fled into exile in the early 1990s to escape repression from the military-Islamist government are being wooed to return. There is greater freedom for the press and possibly greater respect for human rights--though cynics say that this is only because the opposition has been thoroughly cowed. The economy, guided by strict monetary policy since 1996, is expected, on official figures, to see 7% growth this year. Even more important, says the government, God has blessed Sudan's cause with oil, which is expected to provide 22% of the budget this year.

Some outsiders, including some western diplomats, are caught up in this optimism. They argue that Sudan, without Mr Turabi but with an improved human-rights record and flush with oil money, is a country they can do business with. Up to a point, maybe. As ever, Sudanese politics are ambivalent and contradictory. The government may be smiling at the world, but it is no less Islamist than before. Mr Turabi was thrown out for personal, not ideological reasons. His former supporters still pack the cabinet. And while there may be fewer cases of detention and torture in the north, the government fiercely pursues its war against the south. Sudan may want a seat on the Security Council, but it still drops bombs on UN aircraft.

The contradictions spring from the power strucure that underlies all Sudan's politics. Power rests, as ever, in the hands of a few families in Khartoum.
They come from three small ethnic groups in northern Sudan, and are connected to certain religious sects which, in modern times, have become political parties. Politics is a game of musical chairs between and within these families as they jostle for alliances--or betray one another.

Other forces, such as the army, business, trade unions and students, have to be accommodated, but politics is driven by these families. Other Sudanese, wherever they come from, are pawns to be given token representation in the government. The aim of the Khartoum clique is to retain power and keep Sudan together. Its tools are Islam and guns.

Nearly half a century ago, in 1955, the southerners took to arms against the clique. Apart from a peaceful break between 1972 and 1983, they have continued to fight ever since. The war is usually described as a conflict between the Arabic-speaking, Muslim north and the black African, Christian or animist south. That describes the two sides well enough, but their religious and ethnic differences are not the main cause of the war. Basically, it is the south against Khartoum.

Until 1972 the south fought for independence. Since 1983 it has been fighting, officially at least, for inclusion. The Sudan People's Liberation Army (SPLA) was founded that year as a national movement to establish a unified, democratic and secular Sudan. That is still its policy--even though its leader, John Garang, and the vast majority of his followers are in fact southern separatists. They know that the Khartoum clique will never allow Islam to be taken out of politics, or democracy to be brought in.

Occasionally, however, the Khartoum politicians see the need to assuage the outside world. Last year, when Sudan was isolated, and too poor to carry on fighting, Mr Bashir was forced to accept the principle of southern self-determination. It was probably no more than a ploy to buy time and, according to one minister, Mr Bashir himself now thinks it was a mistake. But it has created a bizarre paradox: a national government committed to self-determination for its southern provinces is fighting a long, bitter war to keep the country together against a southern separatist rebellion committed to retaining national unity.

Such contradictions make nonsense of peace talks. On the ground, the war is getting ever nastier. And oil, far from providing an opportunity to make peace, is giving the war a new cause. The present production area is around Bentiu, the northernmost tip of the oilfields. But the main deposits lie farther south, in rebel-held territory. If the government is to exploit them, its army will have to drive the rebels out of their heartland.

At present the opposite is happening. The SPLA is approaching Bentiu, and claims that it will soon attack the town. The 40 or so Canadians working there could make valuable hostages. The SPLA and its allies have also made big gains elsewhere. In the west, they are besieging the garrison towns of Aweil and Wau. In the east, they have captured Hamesh Koreb, Sudan's chief centre of Islamic learning, and they are threatening the oil pipeline to the Red Sea coast.

The government in Khartoum has responded by bombing civilians, driving thousands from their homes. It is busy re-arming, press-ganging young men for the army and pouring out militaristic propaganda on its radio and television stations.

Beneath Sudan's sophisticated diplomacy lies a paranoia born of a belief that the southern rebellion is a plot by the rest of the world to break the country up. Ministers claim that UN relief flights from Kenya carry weapons to the SPLA, or at least provide cover for flights that do. Others point out that most of the aid goes to feed southerners who support the SPLA, and that the UN is thereby helping the rebel cause. They also guess, probably rightly, that the West will not jeopardise its new relations with Sudan for the sakeof a few bombs dropped on the UN.