In the todays WSJ:
A Few Analysts Now See
Oil Prices Rising Next Year
By THADDEUS HERRICK
Staff Reporter of THE WALL STREET JOURNAL
Will oil prices be heading up next year?
Not according to many oil analysts in the U.S., who predict that crude-oil prices will fall to $24 a barrel next year from this year's high of $28 set in August, as increased drilling produces more oil and demand remains tepid amid a weak global economy.
Lately, however, a few analysts and economists have reversed course and now expect higher oil prices, which could have serious implications. "Higher oil costs could threaten economic recovery in the U.S. and Asia," says John Cook, director of the Petroleum Division at the Energy Information Administration branch of the Department of Energy.
A price spike also would be bad news for drivers and those who use fuel oil to heat their homes, especially in the Northeast. The average price of a gallon of regular unleaded gasoline this year peaked at $1.71 on May 14, according to the Energy Information Administration, before falling to $1.37 on Aug. 6. The price is back up to $1.49 and could push higher this year or next if oil prices do rise.
What is the evidence for higher oil prices? For starters, production by the biggest oil companies declined in the first half of the year, and oil from new fields may be slower coming to market than previously thought, the dissenters say. Inventories have shrunk, most strikingly in the U.S., and new production outside of members of the Organization of Petroleum Exporting Countries and Russia hasn't materialized.
At the same time, OPEC will cut crude-oil production by one million barrels a day beginning Saturday, bringing its cuts this year to 3.5 million barrels a day.
Still, in one of the boldest forecasts to date, Steven Pfeifer of New York investment bank Merrill Lynch on Aug. 20 said declining U.S. inventories pose the same threat they did in 1999, when low levels of stored reserves triggered a surge in prices to more than $35 a barrel in 2000. Mr. Pfeifer's latest call: Oil markets are "highly susceptible" to price spikes that would push them to more than $30 a barrel.
Edward Morse, executive adviser at Hess Energy Trading Co., agrees, saying, "Merrill Lynch is by no means as alone as it might appear."
To be sure, a majority of analysts still expect prices to hover around current levels -- West Texas intermediate crude fell 50 cents to $26.58 a barrel -- as rising demand for heating oil is offset by a seasonal increase in crude-oil supplies. By winter, these analysts say, the cyclical oil markets will have peaked and oil prices will begin falling again. Demand for oil is expected to rise by only 800,000 barrels a day next year amid a slowing world economy, according to the International Energy Agency in Paris. More crude oil from non-OPEC sources is expected, as energy companies increased their spending on exploration and production in response to high prices the past two years.
That is the conventional wisdom.
The dissenting camp notes that non-OPEC production, excluding an increase of about 500,000 barrels a day from Russia, has stagnated in recent months. Though spending by some of the biggest oil companies is up as much as 25% this year, only now are budgets climbing to the levels they reached before 1998, when spending was slashed as oil prices collapsed. Also, the lag time between investment and oil production with the integrated oil companies is such that it often takes several years to bring crude to market.
"Industry has been slow getting back in the game," says Larry Goldstein, director of the Petroleum Industry Research Foundation, an energy consulting firm in New York.
Merrill Lynch reports that oil production by the majors fell nearly 1% in the first half of this year. Production by Royal Dutch/Shell Group, for example, fell 4% to 2.2 million barrels a day in the second quarter from 2.3 million barrels a day a year earlier, in part because of complications with a North Sea field.
Meanwhile, OPEC has largely maintained its market share. The September cut in output will bring its official quota to 23.2 million barrels, slightly less than 40% of world demand. It is widely believed that OPEC is exceeding its quota by some 800,000 barrels a day. Still, that may not be enough to push prices down.
Indeed, oil supplies look tight. U.S. inventories, which rose in the spring, fell for five straight weeks before rising this week. Inventories are running nearly 2% below the five-year average, though they still are about 6% above last year's levels, according to the Energy Information Administration. "Even without an OPEC cut in September," Mr. Cook says, "the balance is real tight."
In its latest short-term forecast, the Energy Information Administration predicts the average price of oil in 2002 will be about $27 a barrel. The consensus estimate of analysts surveyed by Thompson Financial/First Call is for oil prices to slip to $23.68 a barrel in 2002 from the estimated average price of $26.67 this year.
Some analysts, such as Fred Leuffer of New York brokerage house Bear Stearns, see oil prices tumbling into the teens as a result of weak demand, increased competition and poor OPEC compliance. But, Mr. Leuffer is left scratching his head over why oil prices have stayed strong. "What gives?" he asks. "I don't really know." |
