Last week, crude oil prices traded above $81 per barrel; an almost 10% higher bid than the summertime average of $75 per barrel. According to the Energy Information Administration’s Petroleum Navigator, prices delivered last week were the highest since the fall of 2008.
Investors will question whether the run-up in price was the result of greedy speculation on the part of traders, or a clear-cut move in supply-and-demand ratios.
“The price depends very much on the economy of the U.S., which is the world’s biggest oil user. It’s pretty obvious really,” said David Jenkins, a director at oil inter-dealer broking company Tradition, as reported by CNNMoney.
For the first time in a year, the U.S. economy grew. According to the Commerce Department, GDP expanded at a rate of 3.5%. The data records a massive turnaround from the 3.8% loss the country has experienced over the past year, which was the worst economic performance the U.S. has had in 70 years…
This growth marks the end of the recession, and spells higher demand for oil and oil products.
Technical analyst Richard Ross, head of global technical strategy for Auerbach Grayson, told Forbes magazine “the price of crude oil will trend upward to $85, then $90, settling in at as much as $103 per barrel within the next nine months.”
Ross provided his blueprint for his prognostication to Forbes. To wit:
Ross bases his triple-digit forecast on five key points: the current absence of overhead resistance in crude oil, which has created a price vacuum; the strong force of momentum currently playing out in the market; the increasing strength in equities, which he argues will filter down into demand for oil; the prospect of a global economic recovery; and lastly, the dollar’s decline, which makes dollar-denominated assets more attractive to foreign investors (something we have already seen play out in stocks and gold).
It seems Ross isn’t alone with his bullish call for crude. Other traders at the New York Mercantile Exchange are also projecting much higher prices for the commodity.
$100 in the Next Six Months
Matthew Cacciotti, president of MMC Trading in New York, also told Forbes that he thinks oil will trade above $100 a barrel sometime within the next six months. “It looks like it is going to go above $80, and from there, the next stop might be $100. It looks like the economy is coming back…and then, with the weakening dollar, [oil] should continue to rally.”
There has been speculation that OPEC may seek an increase in oil production to help alleviate exceeding demand for oil. The cartel isn’t scheduled to meet until Dec. 22 to discuss oil production quotas, but if oil continues trading above $80 per barrel, the 12 members are expected to adjust oil production lines to maintain equilibrium and keep prices reasonable.
As Bloomberg News reported, any increase in oil production “would depend on whether prices remain at $75 to $80 a barrel, stockpiles return to the five-year average, and floating inventories disappear.” Some OPEC leaders are not entirely convinced changes are likely.
Kuwaiti Oil Minister Sheikh Ahmad al-Sabath said Oct. 6 to Bloomberg that “OPEC is unlikely to change output targets at the December gathering and that it is ‘impossible’ for the organization to raise production this year.”
There’s Always a But…
Of course, there’s always a but…
OPEC may raise oil production this December, if prices rise and remain above $85 a barrel.
OPEC president and Angolan oil minister Jose Maria Botelho de Vasconcelos states, “We have always defended a position of equilibrium. Some countries are available to pump more oil into the market and if it comes necessary to pump more oil into the market this will be done.”
Meanwhile, analysts debate whether oil prices are currently being driven by speculators, or by natural supply and demand. With oil jumping 81% this year – even as worldwide GDP shrinks more than 1% – the answer to this debate is essential for gauging the short-term sustainability of current valuations.
OPEC itself seems to believe that a combination is responsible for oil’s dramatic recovery. The United Arab Emirates oil minister, Mohamed al-Hamli, recently told a conference in Russia, “I think it is primarily driven by speculators but there is also support for the current surge in oil prices.”
For its part, Goldman Sachs believes that $85 is the near-term target, with demand mostly coming from China’s 8.9% GDP growth.
“Chinese oil demand is leading the way and U.S. oil demand is lagging behind,” Goldman analysts said in a report made available today, as reported by Bloomberg. “We are likely to see a recovery in which strong emerging-market oil demand puts upward pressure on crude oil prices.”
And There’s Always China…
China is wrapping up negotiations to begin drilling for oil in U.S. territory. According to Qatar’s The Peninsula, “the state-owned China National Offshore Oil Corp, or CNOOC, reportedly is negotiating to purchase leases owned by Norway’s StatoilHydro in U.S. waters in the Gulf of Mexico.”
This is CNOOC’s second attempt to get a hold of U.S. oil assets. China is on a hunt for natural resources in an attempt’s to boost internal demand and continue its stellar growth path.
Some analysts believe China is quickly overshadowing the U.S.’s global role. An article in the Baltimore Examiner says, “China has moved aggressively to fill a vacuum left by the United States in recent years, as the U.S. focused on wars in Afghanistan and Iraq and the global economic crisis sapped its economy.”
Both the U.S. and China consume large amounts of oil and both are actively exploring for new sources. In fact, Ghana has $5 billion in untapped oil reserves. China and the U.S. are vying for a stake in the project.
In fact, “BP, the oil group, is considering making a bid for one of Africa’s biggest offshore oilfields [the Jubilee field] in a move that could pitch it into a direct battle for control with Exxon Mobil, its arch U.S. rival,” reports The Times.
A bid by BP would seriously threaten Exxon’s hopes for a stake in the project valued at $4 billion. However, most analysts say Exxon’s contract in the project is an “exclusive” arrangement and would be enough to keep BP out of the oil field.
But how do big oil companies even have the cash to invest in new oil fields after the beating oil prices have taken since last year’s record prices, and global economies have been contracting?
Cost-Cutting Helps Big Oil
Under these circumstances, oil companies have resorted to severe cost-cutting measures.
These have yielded positive results for companies like British Petroleum (BP:NYSE) and Occidental Petroleum (OXY:NYSE).
BP just released its earnings report showing net profits of $5.3 billion, beating estimates. Occidental Petroleum’s earning show a net income of $927 million, also beating estimates.
Interestingly, these company’s profits and income respectively are down 34% and 59% year over year… yet their share prices are climbing on the news.
These jumps may be momentary, however.
Chris Baldwin from Reuters reports, “Traders anticipated the market would remain nervous about prospects for growth and a series of positive corporate earnings has been based on cost-cutting rather than increased consumer demand.”
And indeed, BP’s costs were significantly cut.
Richard Griffith of Evolution Securities told Forbes that the company benefited from “reduced operating downtime, volume growth and sharply reduced operating costs.”
BP’s costs were down 15% for the first nine months of 2009, and the company now expects to spend $4 billion less year over year for the full 2009, more than double what it had originally estimated.
Occidental Petroleum was even able to expand oil production, which helped it beat estimates soundly. The company’s per share earnings came in 8 cents higher than Bloomberg analysts’ estimates, totaling $0.26 per share for the third quarter.
Profits Are Still Down… Big Time
But as crude oil companies are comparing earnings to the third quarter of last year, when oil prices were at record highs, the numbers show drops in profits for some.
Melinda Peer of Forbes writes, “The third-quarter looks like a messy one for large integrated oil companies since crude prices had climbed to an average $115 a barrel a year ago and gasoline prices supported favorable refining margins. That makes for some tough comparables to 2009’s third quarter...”
Exxon Mobil (XOM:NYSE), the world’s largest publicly traded oil company, reported that profits from July to September dropped 68% to $4.73 billion, or 98 cents per share. The quarterly results were below forecasts.
Rex Tillerson, Exxon's chairman, said the results were "impacted by lower commodity prices and weak product margins. Tillerson also commented “ExxonMobil’s industry leading financial strength has allowed us to continue to invest across the economic cycle focusing on world class opportunities.”
CNNMoney reports that last year Exxon reported the largest annual profit in U.S. history last year, making $45.22 billion on the back of record crude oil prices. But the company's earnings have declined along with oil prices as the global economy contracted.
Conoco Phillips reported third quarter earnings that beat expectations while Petrochina said its revenue missed the market consensus.
Even Royal Dutch Shell reported a decline in oil-related revenue. The BBC reports the company’s profit for the three months to September fell 73% to $3 billion. “We are not expecting a quick recovery,” Shell chief executive Peter Voser said.
The Best Bet in Oil
With slugging demand, some types of oil companies are going to do better than others, such as oil producers versus oil refiners.
William Patalon III, executive editor of Money Morning, writes, “Supply concerns recently pushed oil futures up above $81 a barrel, their highest level in more than a year.”
Patalon interviewed Dr. Kent Moors, one of the world’s foremost experts on oil, energy policy, finance, risk management and new technologies. Dr. Moors said, “If you think the run up to July 2008 was a wild ride, you haven’t seen anything yet.”
What should investors be on the lookout for?
Dr. Moors suggests, “In the next five years, investors who focus on medium- to small-sized producers and oil-field-service companies having a well-developed specialty niche will outperform the overall energy sector.”
Other Articles Related To This Topic:
