Interesting article. The original has some good graphs. It looks like the trend over the last 10 years, for crude prices, has been a random walk inside a range of 15-22 $/barrel. The exceptions were one huge spike in 1980, above the range with the Gulf War, and three dips below 15$. The current dip is the longest in duration of the last 10 years. Here's hoping it's over.
I bought SLB and RIG in 12/98 and 1/99, because I believe in Reversion To The Mean. Moves outside a long-term range are usually followed by a return to the range. There is very little new under the sun.
The article:
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Heard on the Street
Recent Rise in Oil Prices
Fails to Stir Wall Street
By SUSAN PULLIAM and CHRISTOPHER COOPER
Staff Reporters of THE WALL STREET JOURNAL
March 25, 1999
When it comes to big swings in oil prices -- up and down -- Wall Street always seems to see the glass as half-empty.
Last summer, with crude oil trading at just $10.50 a barrel, analysts and investors fretted about the possibility of a deflationary spiral for the economy.
Then there was the worry about oil companies themselves, many of which, some on Wall Street believed, couldn't remain solvent with oil at such low levels. Energy stocks took a beating, ending the year down as much as 50% in some sectors.
Profit-Taking Reverses Powerful Crude-Oil Rally
Now, oil prices have moved up, with the price of crude oil currently topping $15 a barrel, a 43% increase since last year's low (though still well below the early-1990s highs). But Wall Street isn't finding much encouragement in that news either. Sure, exploration and production, and oil-service stocks have rebounded sharply off the bottoms they hit last year. But they haven't regained all they lost. Few think they will soon.
Why all the gloom? Some specialists are now worried about the inflationary effects of rising oil prices on the economy. "By the end of the year, I think inflation, which everyone had given up for dead, will limp back to life," says Byron Wien, strategist for Morgan Stanley. "The most critical component of the consumer-price index is up $4 in a few weeks. I don't think it's serious, but it will be enough to put some upward pressure on interest rates and that's the relevant market factor."
The fact is, oil at $15 a barrel isn't the end of the world. It is about the same price as a year ago. Consumers are still paying a relative pittance for gasoline even with the recent price spike. And $15-a-barrel oil already is factored into the price of stocks, analysts say. (Wednesday, West Texas Intermediate crude for May delivery fell 17 cents, to $15.34 a barrel on the New York Mercantile Exchange.)
Still, the increase in oil prices comes as the stock market already is worried about earnings pressure. So the effect of higher energy prices doesn't help matters much. "Energy is an important component of an infinite number of industries. It will certainly put pressure on earnings," Mr. Wien says. That is particularly true if prices continue climbing.
Not everyone is alarmed. Goldman Sachs strategist Abby Joseph Cohen reassured clients in a conference call Wednesday about the surge in oil prices and later put out a note forecasting that "aggregate profit growth this year will be enhanced by less difficult global conditions. For example, energy-related companies suffered outright losses in 1998 but are expected to be profitable in coming quarters."
Meanwhile, many on Wall Street are taking a wait-and-see attitude about the OPEC agreement on cutbacks in oil production. (OPEC and a small group of non-OPEC producers agreed Tuesday to cut 2.1 million barrels daily, or 2.6% of world production.) After all, shares of major U.S. oil companies already are up 12% over the past 2 1/2 weeks, while the Standard & Poor's 500-stock index is up only 6% during the same period, according to Paul Ting, a senior oil analyst at Salomon Smith Barney. During the same period, oil-service stocks are up 28%, while the exploration and production stocks have surged 20% as a result of the expected cuts in production.
What is more, who can forget that it was only last summer when cartel members and a few other oil-producing nations agreed to whack about 1.7 million barrels out of the global daily crude supply. Today, the countries have achieved only about 70% compliance, meaning they are still producing about 500,000 more barrels a day of oil than they had promised.
"Forget about the new agreement -- how about the old agreement?" says Alan Gaines, who heads Proton Capital, a merchant banking firm. "You know they're going to cheat, the question is by how much."
Mr. Gaines, for one, isn't taking any chances. He is shorting oil for delivery in June, betting on a price decline. His reasons are varied. He figures that a short spike in prices, driven entirely by good intentions, will bring more oil to the market from producers who aren't part of the deal, especially the Norwegians and the British.
Then there is the worry about demand for crude. Even though the Asian economic crisis appears to have bottomed out, possibly setting the stage for an increase in world oil demand, what about the U.S.? "The wild card is the U.S.," Mr. Gaines says.
The good news, if there is any, is that the airline industry isn't expected to be hurt by rising fuel costs as much as anticipated, largely because many airlines locked in fuel costs when oil was at its lows last year. But don't rush out and buy those stocks either, the pros say. They have plenty of other problems, investors say, including lagging demand in the fourth quarter and concerns about capacity.
But trucking stocks are already beginning to reflect the jump in oil prices, with the group down 9.6% this month alone, while the broader market was up slightly. Hardest hit will be the companies with the skimpiest margins, because they aren't as well equipped to absorb the increase in prices.
Just how much pricing pressure is the higher oil price expected to put on the economy? Typically, about half of the increase in the price of oil finds its way into the consumer price of energy products that are included in the consumer-price index, says Richard Rippe, economist with Prudential Securities. By his calculation, the recent rise in oil prices will boost the consumer-price index 0.34%, which will show up when figures for March are reported next month. If oil goes to $17 a barrel, he says, the consumer-price index could get a 0.54% boost.
The increase could be even greater for the producer-price index, up as much as 2.5% at $17-a-barrel-oil prices, by the estimates of a few other experts. When it comes to the effect of oil prices, however, most pros pay more attention to the CPI, for a variety of reasons.
Even if there is a further increase in the price of oil later this year, some experts warn not to look for a return to the go-go days for oil stocks, Mr. Gaines says. "It's not enough to stem the tide," he says. "Fourteen-dollar oil may stave off the grim reaper for the bigger companies but for the smaller ones, the die has been cast. They're dead," Mr. Gaines says.
Mr. Gaines isn't alone in his assessment. Michael Paslawskyj, a vice president of CIT Group, a New Jersey financing company that provides equipment loans to the oil patch, is predicting $11 oil in 1999 and $12 oil in 2000, despite the OPEC promises. He says the OPEC promises run counter to the long-term plans of its members.
For example, Venezuela said earlier this year that it plans to increase its production capability by 3% annually. Saudi Arabia has begun laying plans to convert much of its domestic industry to run on natural gas. Up to now, the country has relied on oil to fire such things as electrical generators and water desalinization plants. Presumably, that conversion will free up more oil for export. "The world is awash in oil," Mr. Paslawskyj says. "The price of oil so far has risen on hype. They're still pumping today what they did yesterday."
Consider Saudi Arabia's position. While the world-wide average cost of producing a barrel of crude hovers around $8 a barrel, the Saudis can produce it for about $2. But Mr. Paslawskyj figures a $10 drop in the price of crude costs the Saudis about $64 million a day in lost income.
When confronted with low oil prices, OPEC nations can take two tacks: They can cut production and hope that decreases supply, or they can raise production, gobble up market share and drive all rivals from the market. Saudi Arabia has adopted both stances in the past. What will they do Thursday? "That's an interesting question,'' Mr. Paslawskyj says.
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How OPEC's Strategy Plays Out
While Helping --
and Hurting Industry
Winners
-- Oil exploration
and production companies
-- Oil service companies
-- Major integrated oil companies
Losers
-- Trucking
-- Airlines
-- Utilites
-- Chemicals
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