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Gold/Mining/Energy : Oil & Gas Price Economics -- Ignore unavailable to you. Want to Upgrade?

To: Rod Copeland who wrote (17)	12/5/1998 5:38:00 PM
From: Ed Ajootian	Respond to of 350

Oil Probably Won't Stay as Cheap as $11 a Barrel by John Dorfman (John Dorfman is a Boston-based money manager with Dreman Value Management in Jersey City, New Jersey. The opinions expressed are his and don't represent those of Bloomberg LP or Bloomberg News. His firm or its clients may own or trade investments discussed in this column.) Energy stocks account for close to 7 percent of the total market value of stocks in the U.S. That's why, when oil prices sank to a 12-year low this week, stocks tumbled. I don't believe $11-a-barrel oil is here to stay. I think oil will top $15 within a year or so, and will poke above $20 some time in 1999 or 2000. A bold prediction? It may sound like one amid today's gloom and doom. But really it isn't. In the past five years, the average price of a barrel of oil has been about $18.61. In the past 15 years, the average price has been about $20.74. So I'm merely predicting a return to more normal conditions. The chairman of the investment firm I work for, David Dreman, likes to say that investors should ''bet on the base rate, not on the case rate.'' The base rate refers to the way things normally are. The case rate refers to the special situation that may apply at a given moment, or that an analyst says should apply. Reversion to Mean It's easy to find reasons that the valuation of a particular stock or commodity should stay higher or lower than normal. But more often than not, prices end up reverting to the mean. Why? It's a statistical tendency. It's the forces of supply and demand. High prices bring out new sources of supply. Low prices cause supply sources to dry up. When oil prices are too low, owners shut down marginal wells. An old well in Texas here, a high-cost well in Canada there, and pretty soon production is decreasing. Eventually, the reduced production capacity means that remaining producers can charge more for their product. By the same token, low prices stimulate people to use oil- based products more freely. And that eventually helps pull the price back up toward an equilibrium level. The same forces apply whether the commodity in question is cars or casinos, oranges or oil. A number of special situations have combined to push the price of oil to its lowest point since 1986. But several of them are unlikely to persist beyond 1999. Here's a quick look at six of the major influences that led to today's low oil prices. It appears to me that at least five of them are temporary. Iraq Iraq. Take a world market already oversupplied with oil, and stir in an increase in the production quota of the world's bad boy, Iraq. That was the recipe for a price decline in 1998. But Iraq is now producing at or near capacity, so there are no further shocks in store from that quarter. I don't know whether Saddam Hussein will be sufficiently stupid to goad the U.S. into renewed military hostilities, or to induce the United Nations to reduce production quotas. Probably not -- he has a knack for backing down when he must. But assuming that the status quo endures, at least there will be no new slug of capacity coming onstream in 1999, as there was in 1998. Weather. The U.S. and Asia have both had warmer-than-usual winters for three years running. The Pacific El Nino current induced this balmy trend. But over the summer, El Nino gave way to a colder current known as La Nina. Most weather forecasters predict a colder-than-average winter in the U.S. this winter. Asia. Many Asian countries entered recessions during 1998. Since Asia accounts for about 20 percent of world energy consumption, and was previously a major growth area, the economic weakness was a punch in the stomach for energy demand. The worst case is that the Asian economic weakness will deepen and spread to other regions such as the U.S. and Europe. The more typical outcome -- the base rate -- would be for the Asian recessions to end in a year or so, and for energy consumption to resume its normal 3 percent annual growth rate. Momentum Momentum. Markets acquire a momentum of their own. To some extent, the price of oil is going down because it has been going down. As downward momentum is palpable, long investors (those banking on a rise in the price of oil) panic out, and shorts place larger bets that oil will fall. As we've seen many times this year, momentum can shift within a matter of days. OPEC. In its most recent meeting, held last month, the Organization of Petroleum Exporting Countries took no action to stem falling oil prices. In its June meeting, it agreed to production cuts of 2.6 million barrels a day, or close to 4 percent of world production. Accounts conflict on how well OPEC countries are adhering to their revised quotas. Of the five unusual situations mentioned here, OPEC's disarray is probably the one least likely to be cured within a year. Turning for a momentfrom the price of oil to the fate of oil stocks, the proposed merger of Exxon Corp. and Mobil Corp. isn't likely to be the last word. Particularly if Exxon and Mobil do combine, other oil companies will merge in self-defense. Whenever a merger wave hits an industry, it tends to have a bullish effect on stock prices, as investors speculate on what the next target will be. My thoughts on oil prices and oil stocks could conceivably be influenced by emotion, notably self-interest. My firm has about 15 percent of its assets in energy-related investments. But the way I see it, five of the six situations discussed above are temporary. That seems to me to make the odds of an oil-price rebound in 1999 fairly high. ***************************************************************************** Thanks Rod, great link. You just stick to drillin' holes & let us do the cut & paste <g>. There have been several great posts here and I plan to comment on them when I have more time, hopefully tomorrow. Now its off to one of my all-time favorite plays, "A Christmas Carol".

To: Rod Copeland who wrote (17)	12/5/1998 6:01:00 PM
From: Arktic	Read Replies (1) \| Respond to of 350

Rod: If it's any consolation, I couldn't get my browser to cut and paste the article either. Usually, it's not a problem. Ed must have some net magic that I haven't learned yet <ggg>! I'm enjoying the content of this thread. Ed... you have commented that you don't want your investments to hinge upon international politics. Like it or not, all investments (not just commodities) hinge on international politics. When Razor starts chortling bullish on oil and gas... time to listen! I think his contrarian analysis is entirely correct. I'm not sure about the timing but if one is patient, today's prices for oil and gas stocks will eventually look VERY inexpensive. I remain puzzled by the tulip bulb stocks (i.e., internet) which have limited economic foundations upon which to predicate their market valuations. Millions have been made in these stocks but I'm not certain that millions will be retained by today's investors. Remember the sizzle stocks of the 60's? At that time there was a two tier market. One tier was based upon common sense economic valuation and the other tier was based upon the "golden" stocks which could only go up... Polaroid was one of those gold plated stocks of the day. I feel extraordinarily burned in the oil patch during the past 18 months. But I also firmly believe there's a lot of money to be made by picking through the carnage. Obviously, judicious selection criteria must be employed when selecting undervalued oil and gas stocks. But some are very ripe for the picking! The bottom is not the time to jump ship. One of my biggest investment disappointments historically was in 1980 when I wanted to drop a signficant chunk of change into Chrysler at $2.50 per share. I was advised by a senior level investor not to buy the dog. I didn't. The rest is history. Again, it appears that we are approaching a bottom in the oil sector. I don't know how soon the upward move will occur. But eventually, it will happen. Nice to be aboard when it does. Paul L. Craig