I used a little tongue in cheek in my editorial comments. Folks have turned so negative on this thread, (and I don't blame them, the hammering we've been taking is totally depressing), but I wanted to show that there is an emerging number of analysts who are putting out favorable comments. I have great respect for these two news letters. Over the years that I've been following them I have found they have very good track records. Stephen Leeb in particular is usually pretty understated in his comments. I have never seen him make such strong recommendations as he is now for this this sector. Both writers are big picture kind of guys who look beyond the immediate headlines. That's the way investors make money.
While I'm at it, if folks will bear with me, I'll make my own foolish observations. Please feel free to correct or add to my basic numbers, there are so many people on this thread with such good backgrounds, and I am going from my best recollections, not from hard data in front of me.
First, I think oil prices have bottomed, and will gradually be moving up. The last big drop was caused by a report that OPEC was not implementing their cuts. I believe they have. They cannot afford not too, their economies are being devastated. The main reason I think so though, is that 18% cut Saudi Arabia announced last week. My reading is that this is in addition to their agreed cuts. Saudi Arabia is resuming their role as swing producer, but only after the other countries implemented their cuts. Venezuela was the main offender, and is at or very near full compliance. there has been very little mention of the Saudi cuts in the popular press, which has been making daily front page news about the "oil glut". Here's where I may need a little tweaking in my numbers. Saudi produces over 8 million barrels per day, about 1/3 of OPEC. 18% of 8 mill is 1.4 million barrels. This is a done deal, effective September. The original OPEC cuts totaled about 3 million, (I think, I keep seeing different numbers, maybe because of the number of cut agreements). Call it a total of 4 million barrels. OPEC is 40% of world production, which is around 65 million barrels. That's a 7% decrease from total production. It does not include the amounts of production that has been shut in from marginal wells, an amount that has not yet been quantified, but which could be substantial, maybe as much as the OPEC cuts. I'm starting to see these shut-ins showing up in quarterly reports. Check St. Mary's (MARY) last report and they have written off a million dollars worth of oil, gone, from shut-ins. This should be happening all over. Consider also the world consumption, in spite of the Asian crises, is supposed to rise by 1.2% in 1998, and beyond, and that worldwide depletion is running around 1.5%. So, at least a 7% decrease, with a good possibility of more, in production, and a 1.2% increse in demand. That's got to catch up, sooner before later IMO.
I believe Saudi Arabia has succeeded in a plan they instituted when they forced through the 10% OPEC increase that was the start of this disaster. They brought the over producers in line, they slowed up new production from non-OPEC, and are bringing oil prices back under control of OPEC and the Saudis. In order to maintain credibility with all the countries Saudi brokered the deals with, Saudi is taking up the swing role, so that the discipline imposed by the cuts is adequately rewarding to all the participants. They are learning that controling production is good, overproducing is bad. Otherwise the agreements would have no value, and the death spiral to their economies will continue.
Investment letters, such as the ones I cited, Bloomberg's, etc, are taking note. They're just still worried that there may some more downside. The downside is not from earnings. The PE's have discounted a far greater drop in earnings than any of these companies will experience. It's further declines in the price of oil that is the fear driver. As I said, I think, and hope, and pray, that the bottom has been hit, and prices will move up as the effects of all the cuts are felt. Several oil ministers have said that the effects have not yet reached the market, and have also said they will cut more if necessary. Once it becomes apparent that the trend is up, even if slowly, oil service will be bought, maybe heavily.
Additional factors that may add to the upwards momentum: probably the Strategic Oil Reserve purchase will be approved by Congress, at some point. The lifting of sanctions on Iraq is out of the picture for the foreseeable future. Whatever Saddam is hiding, he is willing to keep the sanctions in place to keep it. The gloomers, in talking about the glut, always added on a final thought, "and with the prospect of Iraqi oil returning, the glut will get worse." That threat is gone. And political instability could jump up at any time.
Unfortunately Clinton is too engrossed in his problems to want to lead a stronge action against Iraq, he would only be acccused of using it to divert attention from his case, and the UN doesn't appear to have any power, but there is still the possibility. If anything like that were to occur, look out, prices straight up.
So, I risk all by making a prediction, right here for the world to see and facing total humilation if I'm shown to be wacko. Oil prices have stabilized, and will start a recovery, either right now or very soon. With the recovery, money will move into the sector. Allowing for some short term swings, the trend from here is up, and those who can hold or add, as the trend becomes more clear, will make money.
good luck all
Mike from La. |
