Twenty Dollars of Air
I've been exchanging comments the last couple of days with Geoff on the question of whether oil company shares have had their run, and are headed down. With the top-line question being: Is it time to sell one's shares in the oil majors?Geoff kindly led me to an AP story that Forbes posted yesterday. The piece quotes Fadel Gheit, the sober-thinking Oppenheimer analyst.
First, Gheit thinks that traders have driven up prices to their current levels exceeding $90 a barrel. He notes that Wall Street's consensus 2008 forecast average is $75 a barrel.
Which means that, if the estimate is roughly correct, there's currently a bubble of around $20 barrel. Gheit asserts that commodities traders have exaggerated the global supply situation, which is right -- in fact there's plenty of oil sloshing around the world right now.
All bubbles eventually pop. Prices could go a bit over $100 a barrel, but eventually they'll fall as speculators find some other place to put their money.
Here's the key quote: "Declining oil prices dim the outlook for energy stocks, since their performance usually reflects the direction, not the level, of oil prices," Gheit says.
I don't intend to play stock analyst, but simply to note this logical extension of the conclusion that Big Oil is in trouble because its reserves of oil and natural gas are shrinking. The companies to profit from this shift away from Big Oil are national oil companies and oil service companies; they are the growth energy stocks of the next decade or two.
Photo: Lasse Havelund
Rights: Creative Commons
Labels: big oil, Caspian, gheit, hedge funds, oil book, oil stocks, oppenheimer, russia oil
3 Comments:
Here's another article you'll appreciate: http://www.forbes.com/markets/feeds/afx/2007/11/23/afx4367849.html, featuring an IEA economist who predicts that Big Oil will soon find itself at the fringes of the industry. It's an interesting comment from a representative of a major energy agency, and it seems to have been made candidly (though the article is short on details).
Again, I'm inclined to agree with you and the with the IEA economist on Big Oil's future space in the market, but am unmoved by Gheit's forecast of lower oil prices -- without which Big Oil's investment prospects are at worst a wash. For every analyst pointing to a geopolitical premium on oil futures, it seems there's another one, equally "sober-thinking" in my estimation, who declares that we've entered an unprecedented supply/demand paradigm characterized by alarmingly low spare capacity and uncertain exploration prospects.
Vaclav Smil wrote an excellent primer on global energy trends called "Energy at the Crossrads." Buried inside is a chart of historical oil price predictions by major agencies and experts, e.g. the IEA and Daniel Yergin's CERA. My takeaway, after reading it a few years ago, was that most reputable prognosticators are horrendously bad, and the rest are worse. That evaluation is supported by Wall Street's excessively conservative record over the past few years. These days the question of price is further clouded by oil's media prominence and investment volatility, facilitating a he-said/she-said angle on coverage. While I don't know Gheit's forecast record, I do know that Boone Pickens has for decades made uncannily successful investments in oil, and he just loaded up on Western majors (though with what time horizon, I do not know). At the very least, again with regard to price, ongoing intra-industry conflict would keep me from settling in a particular camp (or Peak Oil outpost, as the case may be).
Another quick thought I had while skimming elsewhere: as you indicate in a recent post, Goldman's credibility is riding high in the wake of the banking crisis. Yet after it issued a sudden sell recommendation on oil three weeks ago, futures were only momentarily depressed. Among other factors, a pointed Goldman recommendation, issued amidst growing fear of recession, that nonetheless cuts only 3 percent from futures, and only for a few days, makes me question whether there's an oil bubble. Alternatively, perhaps those who insist that speculation has "artificially" created $100 oil -- i.e. Big Oil executives, OPEC ministers, and analysts such as Gheit -- are either self-interested, obfuscating, or simply not as smart or unconstrained as the early wave of investors.
I'm not a frequent blog commenter. I appreciate having a receptive, interesting forum in which to get my thoughts in order. If you can't tell, I'm in hurry to do so. Ironically, I looked to your blog for insight as a future service employee (attorney) in the regional energy industry, and I'm now fashioning myself a financier. Hopefully in a few weeks, after reading your book, I can engage on your blog's main area of interest.
(Also, it's nice to be recognized, but don't feel obliged to respond to all my comments; I'll continue to be a reader. With your the website's timely focus I'm sure you'll soon have many more.)
Hi Geoff, this to-and-fro is the very reason the market is doing what it is doing: there is a divergence of opinion -- and uncertainty -- regarding where the market is and there it is headed. Glad we'll be watching together and best, Steve
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