Expect More Turmoil in the Oil Market
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

On August 13, I wrote a column in which a former crack energy analyst, Alan Gaines, predicted a jump in the price of oil to $60-$70 a barrel, based chiefly on possible supply disruptions from either the Middle East or Russia.
In response, one skeptical reader, Andrew Neville, e-mailed me to say he thought the analyst was bonkers, arguing that stepped-up OPEC production and the usual cheating (excess production by some OPEC members) would invariably lead to a decline in the oil price to the low $30s. He also questioned my judgment in “publishing such dribble.”
With oil having topped $50 a barrel earlier this week and now trading around $50, it seems clear that the bold forecast by Mr. Gaines, now chairman and CEO of Dune Energy, a Houston based natural gas producer, has a decent and increasing shot at coming to pass. He certainly seems to think so, observing that there doesn’t seem to be any immediate remedy in sight to halt the ballooning advance.
Anthony Orphanos, a portfolio manager at New York’s Austin Investment Management, which runs nearly $300 million of assets, also thinks the direction of oil prices is clearly up. Unless there is a sustained, severe recession, he tells me, oil will continue to move higher throughout this decade, on average 5% a year. (That would push up oil to at least $72.50 a barrel by 2010).
Mr. Orphanos, who expects oil to average $42-$45 a barrel this year and the low $50s next year, figures, other than for rare and very brief periods, “oil at $30-$35 a barrel is history.”
Here’s why he thinks so (a number of reasons which clearly suggest more turmoil in the oil market):
- A supply-demand imbalance, with supply limited and demand increasing.
- There have been no significant oil discoveries in 30 years.
- Most production increases are not from new reserves, but rather from technological improvements.
- New monster hits are unlikely because such major oil-producing areas as Alaska, Oklahoma and the Gulf of Mexico have already been drilled.
- Emerging and rapidly growing economies, such as China, will require more and more oil.
- While there’s plenty of oil in Russia and Iraq, companies are not going to rush to throw investment money into these areas because of terrorist and financial risks. So getting fresh reserves from such countries to the marketplace should take at least five years.
- As for unexplored places that might have oil, such as the China Seas and environmentally-protected areas here, the financial pressures would be enormous, requiring billions of dollars.
To Mr. Orphanos, the investment message is unmistakable – that is, “we’re still early in the energy game and energy stocks belong in every portfolio.” Currently, energy carries an 8% weighting in the S&P 500,
For the average investor, though, he feels energy should represent a minimum weighting of 15% and perhaps as high as 25%. Of the firm’s $50 million he personally manages, about 20% is in energy shares.
Mr. Orphanos, up about 5% this year, thinks anyone who doubts that oil prices will trend higher should simply take a look at what’s happened to oil so far in 2004 despite an abundance of good news – our victory in Iraq, the end of strikes in Nigeria, some political stability in Venezuela, and Saudi assurances of increased production. Yet, oil, he adds, which started the year at about $35 a barrel, is now around $50 a barrel.
Though oil production companies, on average, are up 15% in the past six months, while the oil service sector has risen about 25% in the same period, he still regards the two areas as cheap. On the production side, for example, oil, on a cash flow basis, generally ranges from 4-5 on the low side to 10-12 on the high side. Right now, we’re at 7-8, just slightly above the low. Mr. Orphanos’s top production picks: Encana ($46.68), Devon Energy ($71.19) and British Petroleum ($57.47).
In oil services, he favors Baker Hughes ($43.63), Weatherford International ($50.84), Global Scientific ($30.87) and Ensco ($32.53).
What’s his outlook for these stocks? Significant out performance, he says, over the next five years.