What next for rising oil prices? Houston Business Journal, April 26
Views vary among energy gurus
By Ann De Rouffignac
Oil prices have edged above the $17 a barrel mark once more,
fueling speculation about what lies ahead.
Was last year merely an aberration when prices averaged about
$14 a barrel and hit a historic low of $10? Or will oil soon be
back to its traditional trading range of $18 to $20 a barrel?
As expected, analysts, industry experts and consultants don't all
agree that happy days are here again just yet. In fact, what they
read in the tea leaves for future oil prices varies wildly.
Some predict that prices will continue climbing into the $20
range.
Others say the recent price surge is due to special
circumstances that will disappear by summer, and prices will
settle back down to around $15 a barrel by the third and fourth
quarter.
But industry experts are virtually unanimous on one thing -- even
$15 oil is a big improvement over the past few months, As
recently as February, the price per barrel was in the $11 range.
Here are the various scenarios they expect to see in the coming
months.
George Littell of Groppe Long & Littell in Houston -- Littell
says today's higher oil prices are headed even higher.
The recent promise by OPEC countries to cut production by
two million barrels a day is one of the principal factors boosting
the price to the $17 level. Whether the price goes up or down
from here depends on how much OPEC will either honor or
cheat on their production quotas.
"If they stick with what they agreed, it's radical to cut that
much," Littell says. "That will make a swing in the oil price to the
mid-$20s before the fall."
But Littell believes that most OPEC members really want the
price to stay between $18 and $20. In higher price ranges,
OPEC countries tend to cheat on their quotas to get more
revenue, Littell says.
What hasn't been taken into account in combination with the
OPEC cuts is the drastic decline in U.S. production by almost a
half-million barrels a day compared to last year.
"They (OPEC) have over-corrected," Littell says.
Political conditions could also have a significant impact on the
price of oil this summer, he says.
A deadline on Palestine is approaching, and other Middle East
countries may react as decisions are made, or not made,
concerning Palestinian sovereignty.
"This is on the back page because of Kosovo, but time is short
and the Palestinians might ask for written guarantees from the
U.S.," says Littell.
Another political factor that might come to bear involves the
renewal of the 180-day agreement between Iraq and the United
Nations on the sale of oil. The Iraqis could interrupt the sale of
oil altogether while trying to get a more lenient deal from the
U.N.
"I lean towards another interruption of oil exports from Iraqis,"
Littell says. "If they cut off their oil sale, they could turn this into
a $30 a barrel oil market."
He predicts prices for the rest of the year have about an equal
chance of being in one of three ranges. They will stay in the $18
to $20 a barrel range if OPEC does some cheating on the cuts.
If the cartel sticks to its announced cuts, the price will approach
the high $20s. And if any of the political factors come into play
and everything else remains the same, $30 oil is possible.
"The uncertainty of the price is just wearing everybody out,"
Littell says.
Roger Read of Simmons & Co. International -- Read says the
cuts announced by OPEC, if carried through, would produce
inventories of oil similar to those in 1996, pushing the price to
the mid-$20s, range.
"But as badly as the OPEC countries need revenue, their
number is really $18 to $20 a barrel oil," says Read.
"Production will be adjusted to get $18 a barrel oil. That's what
we'll see at the end of the year."
But Read expects to see an average 1999 price of around $15
a barrel -- only a smidgen above last year's average.
At the same time, the good news is that the trend toward lower
prices in the $12 and $13 range seems to be over.
The impact of this recent price improvement on the oil
businesses has been non-existent so far, Read says. But there is
slightly more optimism among companies.
"We've hit the bottom," he says.
Exploration and production companies will first reduce debt and
pay off vendors. Last year's low prices devastated cash flow
and drastically reduced drilling for oil. If prices hold steady at
$16 to $18 a barrel for six months, he says companies will start
drilling again.
"It's a fair observation that the industry might be trending
towards shorter cycle times," Read says.
He is mum when it comes to making any long-term predictions.
"We don't do a long-range price forecast. If you are right, you
are just lucky," he says.
Howard Bonham, president of Howard Bonham Research --
Bonham still believes that the oil price works on fairly long
cycles. But it may bounce around on its upward or downward
trend line.
"These price changes are not short-term swings. Usually they
turn one way or the other over at least 12 to 15 months,"
Bonham says. "The price will move towards $18.26."
What might speed up the movement toward that $18 price is
the Kosovo factor. There is a huge demand for fuel from both
sides, he says.
Bonham says the price will stay at $18-plus for the rest of the
year unless OPEC cheats, which would bring it down.
Conversely, an increase in demand would boost the price still
higher.
John Lichtblau, chairman of the Petroleum Industry Research
Foundation in New York -- Lichtblau is confident that OPEC
will be able to muster compliance among its members to sustain
higher prices for the rest of the year.
"The shock of the $11 and $12 prices may have helped OPEC
get its act together this time," he says.
But other factors are helping to prop up the prices. Demand in
Asia and in the United States is beginning to improve. And
domestic production has been cut back.
But Lichtblau sees no dramatic change in the fundamentals that
would support the oil price going dramatically higher in the near
term, despite the war in Kosovo.
"Chances are prices will work up-wards for about six more
weeks and then fluctuate between $15 and $18 a barrel for the
rest of the year," he says "That's a substantial improvement over
the $10 to $13 range."
Beyond 2000, prices will be stronger and average in the $16 to
$17 range, but will still not be dramatically higher than this year's
average of $15 to $16 a barrel, he says.
Ken Miller, senior principal with Purvin & Gertz Inc. in
Houston -- Miller questions whether the new higher prices will
last. But he feels we've seen the last of the $12 and $13 oil for a
while.
"I'm boosting the price estimate for the near term," Miller says.
"It's got some momentum from the Yugoslavia problem and the
refinery problems on the West Coast."
He also notes that news on the OPEC front is positive.
"But every time there is a buying spree (driving the price up),
something happens to bring it back down," he says. "As usual,
this market gets over-bought and then over-sold."
Miller sees the price settling back down by the third and fourth
quarters into the $14.35 to $14.95 range. The average for the
year will be about $14.75, a slight improvement over last year's
average of $14.40.
Miller's more conservative outlook is based on his assessment
that world demand is not growing as fast as some others say.
He also doesn't agree that the excess inventory of oil stocks will
be gone by the summer, even if OPEC fulfills its commitments to
cut back.
"The market is reacting to a set of statistics that don't reflect the
real level of oil (inventories) yet," Miller says. "We'll keep
watching it. But the balances (inventories) don't support a $20
price yet."
Bill Beisswanger, director of energy services for Ernst &
Young LLP -- Beisswanger says the recent price increase to
more than $17 a barrel is due to OPEC cuts, seasonal issues
and the psychological impact of the war in Kosovo.
"Prices won't stay at that level," Beisswanger says. "They will go
down and settle at $15 a barrel -- give or take a dollar."
Prospects for higher prices are dependent on the demand in
Asia firming at a faster pace to soak up any surplus oil
produced when OPEC does start cheating on its quotas, he
says.
Barring some big supply interruption or unanticipated jump in
demand, prices aren't going much higher than $18 for the long
term, Beisswanger says.
Victor Hughes, an analyst with CIBC Oppenheimer in
Houston -- Hughes says the pleasant surprise about the higher
oil prices is because supply/demand fundamentals are a lot
tighter than previously expected.
First, the volume of production -- especially in the United States
-- is declining faster than anticipated. About 100,000 barrels a
day have been cut from domestic stripper wells, and this year's
production on the North Slope of Alaska is expected to decline
by 9 percent to 10 percent.
Second, OPEC might finally be seeing the benefit of the restraint
on production and the firming of oil prices to these recent levels.
But if they go much higher, cheating will start bringing them
down in a hurry.
Hughes sees about $16 oil for the rest of the year.
David Garcia, an analyst with Everen Securities in Houston --
Garcia says what's happening today is almost a mirror image of
what happened in late 1997 when oil prices started spiraling
downward
Today, instead of cratering, the econo-mies of Southeast Asia
are on the mend. And in place of increasing quotas by 10
percent, OPEC has cut production by 2 million barrels a day.
But not all of the changes in oil prices can be attributed to
changes in fundamentals. Some of the recent price increase --
perhaps as much as $1 of it -- is the result of traders unwinding
from their massive short positions in the oil futures market.
What will prices be by the end of the year?
"I haven't a clue. But on March 11, I went officially bullish and
we're on our way up," says Garcia. |
