Oil Peak? Don’t Bet on It

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.

The New York Sun

It’s as certain as death and taxes. You spot a sure-fire Wall Street trend. The problem is, you’re wrong and you wind up losing money.


Alas, we could be seeing a replay of this supposedly can’t-miss investment thinking in the on-fire energy sector.


After a couple of sharp drops the past week in the price of oil from its all-time high of $55.67 to about $50 a barrel, Wall Street buzz has it that the price of oil is about to crack, or, at the very least, is stabilizing. In response to that drop, speculation has also become rife that the days of high oil are on borrowed time and that $25 to $30 oil is just around the corner. Reuters also jumped on the bandwagon, raising the question of whether oil had peaked.


If that’s your thinking as well, “don’t hold your breath,” according to Charlotte, N.C. banking biggie Wachovia Corp. “The price of oil is down, but not for long,” says Wachovia economist Jason Schenker, who specializes in energy tracking.


Of immediate concern, he tells me, are low heating-oil inventories. “If they fail to build this winter, we’ll see $60 oil in the summer,” he notes. He points out that heating oil prices, like crude prices, have trended upward, even in the summer months, since the end of the 2001 recession. It’s reasonable, he adds, that colder weather, or the prospect of it, should drive petroleum prices higher over the near term.


Here are a number of other arguments he uses to document his case that the ingredients are in place for a higher oil price:



  • Inventories still remain lower than they should be, which is bullish for the price of oil.

  • Global economic growth is on the rise, and this increase embraces almost every major economy in the world.

  • Supply is very tight.

  • There is very little excess capacity.

  • Refinery capacity in America is limited.

  • Serious supply questions remain about such key oil-producing countries as Russia, Iraq, and Nigeria.

As for the strategic petroleum reserves, currently about 670 million barrels – part of which could always be released – Mr. Schenker observes that’s only about 33 days of oil, which he characterizes as “practically nothing in terms of domestic consumption.” (America uses more than 20 million barrels of oil a day).


To our expert, “the risk in the oil price is clearly to the upside and the price is bound to go higher.” Barring a major global recession, which he notes is not on the horizon, the days of $30 oil are over, he said.


What about the economic impact? It has already manifested itself in lower than expected third-quarter GDP (growth of 3.7%, versus anticipated growth of 4.3%), and. Mr. Schenker sees this trend spilling over into the rest of 2004 and into all of 2005. Wachovia, for example, had been projecting respective GDP growth of 4.5%-5.5% and 4.5%-5% in 2004 and 2005. Now, though, chiefly reflecting the ballooning oil price, these numbers have been scaled back to 4.5% this year and 3.1% next year.


One final note. Our economist cautions that a major terrorist attack on the international oil infrastructure would play havoc with the oil market. In that event, he said, oil could easily be driven to well above $70 a barrel.


***


R word popping up: It’s by no means widespread, but recession talk is cropping up increasingly in Wall Street research. The latest such admonition is from Prudential Financial strategist Ed Keon, who raises the question of whether a decline in the Index of leading economic indicators four months in a row could be foreshadowing a recession.


He notes there have been 20 instances since 1959 when the index was flat-to-down four straight months. In seven of them, the economy went into a recession the following year. While worrisome, this indicator is by no means foolproof. In 1966, for example, when the index fell nine straight months, a recession did not follow. Moreover, in 1994-1995, when the index was flat or down for seven consecutive months, an economic and market boom ensued.


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