Here's is a good take on situation in todays Barrons.imo
SEPTEMBER 25, 2000
Coming: $40-a-Barrel Oil?
But prices should slide by next year
By Cheryl Strauss Einhorn
Demand is outpacing supply. That's why the price of crude has been hitting
10-year highs almost daily. That's also why there's a 25% chance that, even
with sales from federal reserves, oil will reach $40 a barrel this year before
falling into the high 20s in 2001.
That's also why the U.S. can expect rolling mini-crises in the near future, even
though the impact on the overall economy shouldn't be too great.
Essentially, demand is keeping pace with GDP growth. But supplies haven't
kept up.
Three years ago, when Asia's economies collapsed, so did demand. But since
supplies lag demand, it took a while for production to shrink in line with
consumption. In the intervening period, the world became awash in oil.
Storage tanks filled up, refineries were idled and prices plummeted. At around
$10 a barrel, crude actually traded at prices below many companies' cost of
production.
Key Commodities Index
CRB Group Indexes
9/22
9/15
Yr. Ago
CRB Futures
226.30
228.34
200.50
Industrials
223.44
224.96
191.30
Grain/Oils
159.72
157.04
166.40
Livestock
230.82
227.30
208.40
Energy
361.30
378.59
225.00
Precious Metals
267.94
268.72
233.30
Barron's ~ Bridge Telerate
Producers eventually reined in supplies, and when demand began rebounding,
they didn't begin boosting output again. Instead, they waited to see if the
recovery was sustainable and they also waited for their cash flows to improve.
Now capital expenditures are up.
Oil rigs in operation total 200, up from a low of 110, but way below the
average of 330 for most of the 1990s. Part of the problem is that not many
rigs are available; many are already busy looking for natural gas. In fact, the
natural-gas rig count stands at 818, a record high that clearly will keep
needed equipment from the oil fields, for a while.
It will take time -- perhaps a year -- before increased drilling brings new
stocks to the market. By then, the growth in worldwide demand should have
slowed, largely in reaction to high energy prices.
Between now and then, OPEC has promised to add 800,000 barrels to its
current daily output of 29 million, and by yearend, analysts project, the group
will further boost output by the same amount.
Still, that won't be enough. Seasonally, daily demand picks up by three million
barrels as winter begins in the northern hemisphere.
Furthermore, consumers have begun to hoard supplies. Domestic demand for
heating oil is up 10%, versus last year's level, and well above the average of
2.5% for the past two years. But this makes little sense because people aren't
heating their homes now; instead, they're simply stocking up because of
increasingly irresponsible statements by politicians about how high prices may
be this winter.
Yet the current energy crisis isn't just about total supplies, it's also about the
supply chain itself.
Little new storage has been built in the past 30 years. Thus the difference
between a full global tank and an empty one has shrunk as demand has
grown. In the early 1990s, the world could store 20 days of oil supplies.
Now, global capacity is only 10 days, and with the current supply shortage,
the world has much less than that put away. In addition, tankers and refineries
are running close to flat out.
This is why the sale of 30 million barrels from the Strategic Petroleum Re-
serve -- something the government agreed to do Friday and the rumor of
which was a factor in November crude's settling at $32.68 -- is a bad idea.
Refiners will now either have to stop taking foreign crude or store Uncle
Sam's.
Unfortunately, the market is in "back-wardation" -- meaning supplies for
current delivery are dearer than those for future sale. Such a price
environment makes it not only expensive, but uneconomic, to put oil into
storage. Refiners would lose money.
The world is stuck for now and that's why we've seen "rolling mini-crises," as
Goldman Sach's director of commodity research, Steve Strongin, puts it. We
saw heating oil prices spike last winter when we had a cold-snap in the
Northeast and we saw petroleum briefly command $100 a barrel in the
Midwest this summer when a pipe burst in Michigan.
Still the adverse impact on gross domestic product has been minimal. Strongin
estimates it has cut GDP by 0.25-0.75 of a percentage point, much of which
we've already felt. "This should lead to a moderate slowdown in growth, but
not a global recession," he says.
Expect more volatility ahead. But by next year, as new supplies come to
market and demand growth eases, prices should fall, to an average of around
$27 per barrel. |
