Slider: Some very bullish oil forecasts from this week's Barron's. Wonder if they have been reading your posts.
December 21, 1998
Iraq and a Hard Place
By Kathryn M. Welling
Fighting the last war.
It's an all-too-human tendency. One that most likely explains the oil market's classic
sell-on-the-news reaction to round whatever it is now in the U.S. v. Iraq.
What everyone remembers, notes Tom Petrie of Denver-based Petrie Parkman & Co., is that the
last time we sent cruise missiles in Saddam's direction, back in January '91, crude prices cracked
even before the Republican Guards did. Ergo, war with Iraq is bearish for the price of crude.
Trouble is, says Tom, whose route into oil-patch investment banking took him through the ranks at
West Point, that knee-jerk reactions to military actions have often proven -- six months or a year
later -- to have moved the market in precisely the wrong direction.
This time around, Tom wouldn't be at all surprised to see the market's initial judgment borne out --
for a little while, assuming the U.S. bombing doesn't totally take out Basra or other critical Iraqi
oil facilities. Freed from oil-for-food program constraints, Tom points out, Saddam may even pour
more oil on glutted world markets once the bombing stops.
"But more important, longer term, is the catalytic effect these recent developments may have in
unleashing a new round of fundamental instability in the Middle East." It is not at all clear, Tom
warns, that we will accomplish "what we'd really like -- the elimination of Saddam. We may in
fact be doing the exact thing that will strengthen his position."
And we could well be stirring the Mideast's roiling pot, Tom emphasizes, at a point when "oil is
being priced with zero security premium," and when we are also creating dynamics in our global
relationships with China and Russia "the likes of which we haven't really seen in some time."
The oil industry, in Tom's view, "doesn't really work at $10 a barrel." As evidence, he points not
only to the havoc wreaked in producing countries' budgets and to industry mega-mergers, but to
disturbing signs of destabilization in the crudely stitched social fabrics supporting regimes in Iran,
Kuwait, even Saudi Arabia. In other words, Tom says, cheap oil may be a good thing for
consumers, "but too much of a good thing can become a bad thing." Which is why he won't be a
bit surprised to see "self-correcting market forces" taking the black stuff back up to around
$16-$18 a barrel several months down the road.
Fred Leuffer, a Bear Stearns senior managing director and all-around oil guru, disagrees only in
degree. He's even more bullish on oil for '99, forecasting an average spot price of $18.50 a barrel
for West Texas Intermediate crude. Not particularly because of geopolitical worries -- however
large they may loom at the moment. Fred's take on the oil price outlook is instead much more
grounded in those other basics: supply and demand.
All this year, Fred notes, there's been heavy emphasis in the oil market on excess supplies and
disappearing demand: Asia falling off the map, unusually warm weather. What's gone almost
completely unnoticed, he marvels, is that production plans for '99 have actually been cut more than
have demand forecasts. Indeed, he says, his latest survey of 18 major oil companies indicates that
oil and gas production next year will be 1.4 million barrels a day less than those companies
planned only six months ago. "And this is a capital-intensive industry that's supposed to take a
long-range view."
Oil has traded below $15 a barrel only four times in the past 20 years, Fred points out. "In '86,
'88, '93 and this year. The other three times, what brought it back up wasn't a surge in demand,
but a cut in supply." Like the one he sees in the works.
"The pendulum is being swung in the opposite direction," says Fred. With the oil majors slashing
production, the marginal demand for OPEC oil is actually increasing: By Fred's calculations, the
"call" on OPEC oil in '99 will actually be more than 600,000 barrels a day higher than forecast six
months ago, despite slowing world economic growth.
Which is precisely what OPEC's major players -- who are engaged in a bare-knuckled battle for
market share, in Fred's view -- have wanted all along. "Now, psychology is really bad. The bias
to the negative side is huge. It won't take much to turn oil around. And it'll be 'safe' for OPEC to
raise prices -- no one will respond, believing the hikes can't stick."
Could oil surprise on the upside? Stranger things have happened, certainly. Just in the last week. |
