What Now Wednesday? Some Shallow & Deep New Year’s Thoughts

Posted on by zman

Happy New Year! Today's post includes some of my "big picture" energy thoughts for the first quarter and 2008. These aren't predictions but more like themes to view the energy world by. In tomorrow's post I'll include some links to  valuation tables to help give us a little basis as we venture out into the new year. Otherwise, you might be tempted to listen to the talking heads who frequently make trite comments like, "ooohhh energy, energy has had a good run, I might look at something more beat up, like the financials" to which I would retort were I invited to " you silly baboon, despite the energy sector's drubbing of the broader markets last year, the stocks are, on average, much cheaper than they were 365 days ago, with improving cost positions and stronger balance sheets ... you can't even trust the numbers on the balance sheet, let alone understand the off balance sheet shenanigans in the financial sector... you silly baboon".

Themes:

A) The recently abandoned will see the light of day: Often the changing out of calendars is like flipping a light switch. Things that were working suddenly become so last year. And the abandoned see the light of day after months of tax loss pummeling.

  • Drybulk makes a comeback. There is little doubt that 4Q07 numbers are going to be big for most of the players in the group. Rates have come off peak levels but I don't see them plummeting to anywhere near 2007 averages as demand for coal and iron ore from the great black hole that is China is not about to abate.
  • Tankers will likely see an improved 2008 relative to 2007 stock performance. More oil on the high seas than year ago levels has yielded a recent jump in rates. The group has also seen declining inventory build and greater than normal decommissioning will occur as ships are converted to drybulk status. Consolidation of this highly fragmented sector is likely. 
  • Small Cap Refiners Have Suffered, Look For A Reversal Prior to Better Numbers. WOW, talk about tax loss selling in the face of 4Q07 numbers which are likely to be down on both a sequential and YoY basis. These are going to get interesting in light of $4 gasoline at the pump this spring (see below). Ethanol plays could also get interesting again. If you haven't seen a chart of ethanol of late check this out.
    • WNR down 63% since the summer peak to end the year essentially flat.
    • FTO and ALJ will also be interesting.
  • Small Cap E&P more of a mixed bag. I think many of these names will see rebounds early in the new year. Look for a report soon covering a handful of little guys.
B) Mid & Large Cap E&P To Continue To Please. What has been working will continue to work during the first quarter as long as oil holds mid $80s and natural gas holds $7. Production volume growth expectations are high and 4Q and early year numbers are likely to beat at many of our favorite names. 

C) Crude Oil (WTI) will likely trade sideways through the first quarter in a range of $75 to $105. The first few weeks of the new year will be psychologically key.  U.S. oil inventories should bottom out in mid 1Q rebuilding to a top in 2Q (at a lower level than they did in 2Q07). This pattern should keep oil at its currently elevated levels through much of the year.  These prices are better than most analyst expectations and should be good enough to drive producers to another good stock price performance year in 2008.

  • If we get a recession it will take negative job growth to significantly impact oil demand in the states.
  • OPEC has gotten its groove back so to speak on maintaining an unspoken price band for crude and will likely be able to get away with only modest increases in production for export, given economic uncertainty,
  • Producing nation demand will increase. Short statement large impact. 
  • Terrorist events are unlikely to drive lasting supply disruptions in the Middle East. In Africa, specifically Nigeria, anything could happen. I think the real threat is in Mexico where rebel groups have gotten more organized and daring in their efforts.
  • Israelis likely to strike Iranian reactor prior to its startup in Summer 2008. Short term spike in crude but Iran cannot afford to shutter production for long and threats of closing the Straits of Hormuz are empty.

D) Gasoline: $4 at the pump in May/June. For now gasoline inventories are fine but the impact of $90+ oil in December (the heating season) is much different than that of $90+ oil in the Spring as refineries gear up for the approaching driving season. Crack spreads must improve as utilization tumbles during this shift (probably starting in February) or the first maintenance season will be a long one. Either way, pump prices very likely exceed year ago summer levels and depressed refining shares will benefit as cracks expand seasonally. 

 

E) Natural Gas will likely trade in a range of $7 to $8.50 in 1Q08.

  • Production probably rose just under 3% in 2007; this is unlikely to be repeated at $7 gas.  The strongest performance being turned out by Texas, Oklahoma. This will be the first increase in annual gas production from the Lower 48 since 2001. I'll have more detail on the U.S. supply picture as usual but I do not expect similar strong performance in 2008 unless prices move up to average above $8.

Note: (CHK) will become the largest natural gas producer in North America. Although the goal has been stated for two years the fruition of this goal will energize the shares and help to break them out of a now 2 1/2 year long base

F) Imports From Canada Finally Fall Significantly This Year. I said this would happen last year and so far no appreciable drop has occurred in volumes however drilling has been abysmal. The dichotomy cannot continue, especially with industry north of the border growing ever more hungry for gas.

 

G) Oil Service Mixed But Improving Bag ... Especially Strong For All Things Deepwater. Questions: if you are subject to the law of large numbers and a declining conventional reserve base or your name is Mexico, Brazil, China or a dozen others, what is the best way to grow? Answer: Find a partner, hire out a rig or two that won't be available for another 2 to 3 years and go fishing for big reserves in the deepwater. Deepwater rig rates should remain elevated above the $500,000 per day range in the hot regions of the globe. Look for continued strong growth out of deepwater dominators (RIG) and (DO) but also from (OII), (DRQ) etc.

Ok, that's it for now, I'll have more on the weekend and over time some will get modified or completely reversed. Look for links to revised multiple tables for each sector in tomorrow's post and for a new E&P specific tab with multiple metrics.

Odds & Ends

Analyst Watch: (BHI) cut from buy to neutral at JP Morgan, (HES) cut from buy to neutral at UBS,

(CHK) sells a VPP (volumetric production payment) covering 210 Bcfe or 2% of its reserves for $1.1 billion as part of its plan to monetize non-core oil and gas assets.  Great trade-off for them as the proceeds will be reinvested in much higher return projects.

Nigeria Watch: Fresh rebel attacks are sending crude up $2 this morning. Attacks on two police stations and a hotel left 12 dead. The reaction in oil may be a bit much for non-oil related moves on the part of the rebels although this could also signal a new, higher level threat to stability in the country.

 

144 thoughts on “What Now Wednesday? Some Shallow & Deep New Year’s Thoughts”

  1. 8:24 am EST

    Nymex Crude Above $98/Bbl, Highest Since Nov

    By Nick Heath
    Of DOW JONES NEWSWIRES

    From MARKET TALK:
    [Dow Jones] Nymex crude rises above $98/bbl after militants launched a lethal attack in Nigerian oil industry center Port Harcourt and analysts predict a seventh straight drawdown in US crude oil stocks. Nymex Feb crude jumped as high as $98.29/bbl at 8:14 a.m. EST Wednesday, the highest intraday price since Nov 26. Now, Nymex Feb crude +$1.85 at $97.83/bbl. (greg.meyer@dowjones.com)

    LONDON — Crude oil futures climbed more than $2 in London trade Wednesday on news of militant attacks in Nigeria’s main oil producing region and as analysts predicted another week of drawdowns in U.S. crude oil stockpiles.

    An assault on the Nigerian oil industry center of Port Harcourt Tuesday left 13 people dead, and renewed fears that Nigerian supplies, already handicapped by previous militant activity, could face further disruption in coming months.

    “Although the violence has not yet impacted oil flows, this possibility certainly cannot be ruled out given the gravity of the attacks,” said Edward Meir, an analyst at MF Global in New York.

    Meanwhile, analysts predicted U.S. crude stocks will have posted a seventh successive week of declines when inventory data is published Thursday.

    At 1214 GMT, the front-month February Brent contract on London’s ICE futures exchange was up $1.79 at $95.64 a barrel.

    The front-month February light, sweet, crude contract on the New York Mercantile Exchange was trading $1.42 higher at $97.40 a barrel.

    The ICE’s gasoil contract for January delivery was up $7 at $846.25 a metric ton, while Nymex gasoline for February delivery was up 327 points at 252.35 cents a gallon.

    Tuesday’s Nigerian violence followed recent attacks by government troops on militant strongholds near Port Harcourt, part of government attempts to restrain militants whose sabotage of energy infrastructure has shut-in more than 500,000 barrels a day of Nigerian crude production for two years.

    But Tuesday’s reprisals by militants suggest fresh uncertainty surrounds future Nigerian oil flows.

    “With the military and the militant warlords engaged in a violent tit-for-tat, the risk for oil disruptions in Nigeria remains higher than in the past few months,” said Olivier Jakob of Petromatrix in Switzerland.

    In addition to Nigerian supply concerns, crude prices were also supported Wednesday by expectations of a further drop in U.S. crude oil inventories.

    According to a Dow Jones survey of analysts, data due Thursday from the U.S. Department of Energy will show U.S. crude oil stocks have fallen for the seventh week in a row in the week to Dec. 28.

    Crude inventories are expected to fall 1.8 million barrels, according to the mean of six analysts’ forecasts. Gasoline inventories are seen growing 1.6 million barrels, and stocks of distillate, which includes heating oil and diesel fuel, are expected to fall by 300,000 barrels.

    With prices having held over $90 a barrel throughout the year-end period and into 2008, crude looks likely to tackle the psychologically important $100 a barrel mark in the near term, some suggested.

    While economic slowdown and the potential for milder weather further into the northern hemisphere winter remain potential risks to higher oil prices, a cold snap currently affecting Western Europe and parts of the U.S., alongside commodity index buying at the start of the year and the lure of $100 itself, could help set crude on its path to triple digits, said Peter Beutel of trading advisory firm Cameron Hanover.

    “It should not take the bulls too long to break $100 a barrel,” he said. “Prices seem set up to assault that level almost right away in 2008.”

    —By Nick Heath, Dow Jones Newswires

  2. Heating Degree Days were just a little warmer than normal for December. 871 actual vs 885 normal…and it was much colder than year ago levels of 743.

    November readings were much the same, about normal and colder than last year.

    …so much for the warm forecasts so far. Arctic air this week is covering a good chunk of the country, driving another rally in NG prices this morning.

  9. So lets see, if you essentially sell 2% of your assets for $1.1 B (and these are non-core assets mind you) that would value your entire asset base at something like $55 billion. If your enterprise value is $31.4 B it seems that the Street is missing something. Such is the story of CHK. They keep telling people their NAV is much higher than their current stock price gives them credit for, and then when they do deals like today’s VPP you get glimpses of the potential valuation but the Street continues to ignore, the prospect inventory, the growth targets (which are always met) etc. Even with today’s new, the stock continues to trade worst in class among its peers.

  13. Morning all.

    Z still lighter than normal volumes in energy. I don’t think volume gets back to normal in any market until next week.

  14. A – I was just looking at that. Think an analyst had something negative to say although I don’t see it.

    Thanks Nicky, agreed….it looks like the stocks were drawn up in a vacuum along with oil this morning.

  16. N – did you see nat gas?..at least another two big draws coming which will wear down YoY comparisons over 150 Bcf between the two reports. That puts us closer to (but still above) the five average but then you’ve got some very tough comps coming…a whole series in early 2007 of 200+ Bcf withdrawals, that should keep gas from blowing out much north of $8.

  17. Yes Z – agree re nat gas. It looks to me as if it will put in a top somewhere between 8 and 8.50.

    As far as wti inventories go tomorrow I saw it mentioned that they may be keen to suppress a major crude build ahead of good builds in the coming weeks as LIFO tax optimisation is a strong driver as inventory levels are set for the year ahead.

  24. Move in energy looks overdone if this is based on the Nigerian news. That said I guess we are clearly seeing what they have in mind for this market now the big players are back.

  29. hmmm, nothing on drudge re Osama…

    N – if we assume that oil shouldn’t be up here anyway then $2 up on a very violent day in Nigeria is not such an over-reaction. I don’t think it has much staying power unless we see follow through or we see that Shell just says “screw this and leaves the country”…not much chance of that.

  31. re capture…psych angle would be a bit neg for oil as geo-pol risk seen dipping a bit but he’s yesterday’s news and the problem is like a hydra, cut off one head and it spouts three to replace.

  32. Z – the attacks in Nigeria today were nothing to do with oil related facilities – its just another excuse to ramp it.
    If as you say the price of oil is based on fundamentals then why did oil not drop on the Iran news last month? It should have collapsed $15 as they had spent all year saying it was up on the Iran factor.

  33. right, a hotel and two police stations…but they are rare in terms of death toll and I’m saying that if we see a turn to more anarchy style violence it could cause companies to rethink personnel and investment placement in country.

    I never said oil price was entirely based on fundamentals

  35. Technically the market looks poised for 105 – 106. My only concern is that they are now even wheeling out analysts on CNBC who are citing that level – its now too obvious! Rarely does the the market do what is obvious.

    Z – yes I agree with your thoughts on the increase in violence. My own thoughts are this is already well in the price. Nobody ever mentions the demand figures that I posted on here on Friday which continue to be adjusted down.

  37. As far as the Elliott wave count goes there appears to be little doubt to me that we are in 5 and within 5 we are in iii.

  38. You mean how they don’t jive with the weekly data? They never do although over the long run the direction of change usually matches up. I use the weekly data for trading as its obviously more timely and in the back of my mind I keep the thought that the EIA’s demand data is at times over-zealous and at times low to actual.

    WTI is trading technically now. I just find it funny that the perma bulls went bearish 5 weeks ago and are now going to have to miss out on saying “I told you so” when it breaches $100 or maybe they will flip again. I change my thinking with new data as well but these same guys played up violence and terror and then they act like world peace has come to fruition, all the while avoiding talking about the numbers that I talk about every day. Of course, I don’t put my phone number in the post not once but twice (PF today) begging for new accounts and I have no account book to talk a certain direction.

  39. Great start to the first day of 2008 – indices falling and oil at almost $100.

    SPX has good support at 1440.

  40. don’t forget all time high for the current gasoline and heating oil contracts, lol.

    and nat gas at a 5 week high.

  43. SNG up 8% today. They are payoff drill depths in Trinidad. News on results any time now. Check it.

  45. Clearly a weakening economy has no bearing on the oil market….

    99.29 should trigger a new round of stops.

  46. 11:30 am EST

    Nymex Crude Above $98/Bbl On Supply Jitters

    By GREGORY MEYER
    Of DOW JONES NEWSWIRES

    NEW YORK — Crude oil futures surged to a five-week high Wednesday after militants launched attacks in a leading Nigerian oil-producing city and analysts forecast another drawdown in U.S. crude oil inventories.

    Light, sweet crude for February delivery was recently up $2.03, or 2.1%, at $98.01 a barrel on the New York Mercantile Exchange, the highest intraday price for a front-month contract since Nov. 26. Brent crude on the ICE futures exchange rose $2.33 to $96.18 a barrel.

    Prices leaped on reports that militant attacks Tuesday on targets in Nigeria’s main oil industry center of Port Harcourt left 13 dead, renewing fears that Nigerian supplies, already hampered by past militant action, could see further disruption in the future.

    “This again focuses the market on all the different areas where there could be upsets” to supply, said Andy Lebow, a senior vice president at MF Global in New York. “It doesn’t look like there’s any impact on the supply side yet, but it focuses the market on what could happen.”

    Adding to concerns about supply, analysts surveyed by Dow Jones Newswires predict U.S. oil inventories to fall for the seventh straight week in data due out Thursday.

    Crude oil inventories are projected to fall by 1.8 million barrels, according to the average of six analysts’ estimates. Gasoline inventories are expected to grow by 1.6 million barrels, while stocks of distillate, which includes heating oil and diesel fuel, are expected to fall by 300,000 barrels.

    While U.S. crude-oil stockpiles commonly fall at the end of the year, analysts say another draw reported Thursday would support the market because inventories are already at at their lowest level in nearly three years. “Everyone continues to look at the possibility of a bullish report,” said Peter Beutel, president of Cameron Hanover, a New Canaan, Conn.-based energy risk management firm.

    The dollar also weakened ahead of the 10 a.m. EST release of the Institute for Supply Management’s December manufacturing report, lending support to dollar-denominated crude futures. Cold weather over the next couple of days in the U.S. Northeast, the world’s largest heating oil market, has propped up heating oil prices, which in turn drove crude, traders said.

    In the first trading session of the year, index funds that track commodities may also be buying futures as they rebalance portfolios, Beutel said.

    Oil futures rose more than 57% in 2007 on a combination of factors including tight supply, geopolitical tensions in oil producing regions and a weaker dollar. With many of those factors still at play this year, analysts say the new highs early this year are a possibility.

    “We continue our march towards $100,” Beutel said. “We couldn’t do it in 2007, so the bulls are determined to do it before the (Jan. 21) Martin Luther King birthday holiday.”

    Others are more skeptical.

    “It looks like 2008 is starting off on the bullish side of the equation but do not be fooled by the year’s opening move,” Alaron Trading Corp.analyst Phil Flynn said in a note to clients. “This year oil could be ready for a move lower for the first time in a very long time of shattering records.”

    Front-month February reformulated gasoline blendstock, or RBOB, rose 5.22 cents, or 2.1% to $2.5430 a gallon. February heating oil rose 5.46 cents/points, or 2.1%, to $2.7040 a gallon.

    —By Gregory Meyer, Dow Jones Newswires

  47. Nicky – you saw that chart of GDP growth vs U.S. oil demand I posted a few weeks ago, right? It takes quite a recession to really dent demand.

  51. N – well not out of the energy stocks, very green around these parts today…the XLF stocks are sucking wind however.

    Let me know what Sharon has to say.

  55. Z – she says its the worst day of violence for months in Iraq, riots in Pakistan and Nigeria.

  67. N – FYI, Hays Advisory, Citigroup, and Blackrock are all saying 2008 will be fine, with double digit growth in the indexs.

  68. Ram – true and true. PBR up slight despite a 1.6% drubbing for the Brazilian stock exchange which is falling with the U.S.

    SWN best performer today among the gassy names.

  69. Z #6 CHK January options call volume is huge. I have a number of positions cumulated over many months at $12.50 To $55 strike prices. Irrational exuberance?????

  72. Hmmmm, if the Dow cracks 13K, then that’s not good. Watch the first 10 days of trading in the new year to determine the direction of the market for the rest of the year.

  73. Doc – re CHK – I think a lot of investors thought the VPP news was pretty good, but the reception by analysts seems to be either delayed or luke warm as usual.

  74. $100 dollar print looks a fraud as it is some 60 cents before the trades that came before and after. That said they are likely to take another shot at it.
    Note that volumes are well below average….

  76. fly in the ointment Sam is that with this being an election year odds are good we end higher.

  78. If oil stays over 100 the Middle East countries will cut production. Production is falling permanently in most areas. They’re going to decide its more profitable to cut production rather than collect dollars and only earn 4% on the money. CHK wasn’t stupid when they cut production when gas prices droped because they knew the long term trend was for higher prices

  80. For the performance of the E&P companies, it would be better to see oil drift off into the mid to low $90s to give the market a chance to recover some.

  81. CHK: $40 acting as ceiling, we get through that on a closing price (and we should be above it by now) and it will likely serve as a new floor.

  82. 12:51 pm EST

    Nymex Crude Hits $100/Bbl On Supply Jitters

    By GREGORY MEYER
    Of DOW JONES NEWSWIRES

    NEW YORK — After months of anticipation, oil futures reached $100 a barrel Wednesday on fears of interrupted supply from big oil producing countries and an amalgam of other factors.

    Light, sweet crude for February delivery touched $100 a barrel for the first time at 12:09 p.m. EST before pulling back to $99.13 a barrel, up $3.15 a barrel or 3.3% on the New York Mercantile Exchange. Brent crude on the ICE futures exchange rose $3.45 to $97.30 a barrel, after also besting its intraday high.

    Oil futures remain below their inflation-adjusted record high U.S. price of $102.81, set in April 1980.

    Triggering the latest round of buying after Nymex crude’s 57% runup in 2007 were reports of militant attacks Tuesday on targets in Nigeria’s main oil industry center of Port Harcourt that left 13 dead. The violence spurred fears that supplies from Africa’s largest oil producing nation, already hampered by past militant action, could suffer more disruption in the future.

    A bomb blast in Algeria, another member of the Organization of Petroleum Exporting Countries, added to supply worries. Also, all of Mexico’s four oil loading ports were closed due to rough seas in the Gulf of Mexico, raising short-term concerns about Mexican exports.

    “It’s just a confluence of factors that got it revved up,” said Jim Ritterbusch, president of Galena, Ill.-based oil trading advisory service Ritterbusch and Associates. “It’s brought a lot of speculative buying back into the long side. There’s really not much commercial selling to slow it down.”

    Heightening concerns about supply, analysts surveyed by Dow Jones Newswires predict U.S. oil inventories to fall for the seventh straight week in data due out Thursday.

    Crude oil inventories are projected to fall by 1.8 million barrels, according to the average of six analysts’ estimates. Gasoline inventories are expected to grow by 1.6 million barrels, while stocks of distillate, which includes heating oil and diesel fuel, are expected to fall by 300,000 barrels. The data will be updated with additional analyst forecasts later Wednesday.

    While U.S. crude-oil stockpiles commonly fall at the end of the year, analysts say another draw reported Thursday would support the market because inventories are already at at their lowest level in nearly three years.

    “Everyone continues to look at the possibility of a bullish report,” said Peter Beutel, president of Cameron Hanover, a New Canaan, Conn.-based energy risk management firm.

    The dollar also weakened, lending support to dollar-denominated oil futures, after the Institute for Supply Management reported the U.S. manufacturing sector ended 10 straight months of growth and contracted in December.

    Cold weather over the next couple of days in the U.S. Northeast, the world’s largest heating oil market, has propped up oil prices as well, though the National Weather Service’s six-to-10 day outlook is for above-normal temperatures in the Northeast.

    In the first trading session of the year, technical buying from “funds reinstating their long positions in the new year” is also fueling the rally, said Glen Ward, energy broker at ODL Securities.

    Front-month February reformulated gasoline blendstock, or RBOB, rose 7.52 cents, or 3% to $2.5660 a gallon. February heating oil rose 8.78 cents, or 3.3%, to $2.7372 a gallon, after reaching a front-month record intraday high of $2.7465 a gallon.

    –By Gregory Meyer, Dow Jones Newswires

  84. Rumors that Merrill Lynch could write down a further 10Bill on top of the 8 that has already been written down. Announcing job layoffs maybe as early as tomorrow.

  89. TLM gap-filling

    RIG rally starting a recovery in DO. Those types of downgrades won’t shift sentiment more than a day unless other analysts pile on. I’m sure it was a valuation call and not a “something’s amiss” call which will get little follow through from the Street.

  90. If they can hold energy up into the close then it should definitely be taken over 100 in Asian trading.

  91. N – agreed. Thinner market there. Can they sustain through British trading w/o further violence though? Maybe you get to $105 in the next couple of weeks… then what? $100 obviously gets called as the new floor and when we break it, look out below! Quick step back to $97 and a break of that (if it occurs) yields a drop to $86.

  92. Part I

    12:57 pm EST

    Crosses Line After Years Of Diverging Demand, Supply

    By MATT CHAMBERS andJOHN M. BIERS
    Of DOW JONES NEWSWIRES

    NEW YORK — For $100 oil, the third time was the charm.

    The oil market chose the first trading session of 2008 as its stage for the final and successful run toward the milestone. Light, sweet crude oil for February delivery hit $100 a barrel on the New York Mercantile Exchange at around 12:10 p.m. EST. Recently, the front-month contract was at $99.50 a barrel, up $3.52 on the day.

    Although the impact of events behind oil futures’ rise on Wednesday have been augmented by funds flowing into the market, those events represent the broader concerns that have taken oil 64% higher since the beginning of 2007.

    Oil futures rose on supply fears borne of attacks in oil-producing Nigeria, a weaker dollar and portfolio shifting by funds in the new year. Last week, amid low volumes, oil stayed surprisingly buoyant on news that Benazir Bhutto, the former Pakistani Prime Minister and opposition leader, was killed in a suicide attack. Falling U.S. crude-oil inventories, which have been on a six-week slide, are expected to post another decline in government data scheduled to be released Thursday.

    Although investment banks like Lehman Brothers and Credit Suisse continue to predict oil prices in 2008 and beyond in the high double digits — forecasts that imply a retreat from current highs — the year-end rally came on a confluence of systemic factors that won’t be easily resolved. Even if prices fall from $100, they won’t fall very far.

    Despite pointing to “obvious global economic uncertainties,” Merrill Lynch on Dec. 13 raised its 2008 oil price forecast by $10 to $82, predicting that oil supply constraints, along with a “solid” demand picture would essentially offset rising macroeconomic concerns. The investment bank also increased its long-term oil price by $10 to $70.

    “Biggest risk to 2008 forecast is a potential contagion to emerging markets from a decelerating U.S. economy,” Merrill Lynch said in the report.

    No Shock This Time
    The last time oil prices were trading near these levels in real terms, the world was reeling from the overthrow of the Shah of Iran and the Iranian Revolution, as well as the start of the Iran-Iraq war and lingering fallout from the Arab oil embargo of the early 1970s. The price spikes these supply shocks caused were blamed for inflation, recessions and long lines at U.S. gasoline pumps.

    This time, even though prices have risen tenfold from when they bottomed near $10 a barrel in 1998, there have been no major supply shocks to fuel the rally and so far, no major economies hurled into recession. Growth in the U.S. has decelerated in the second half of 2007, but economists attribute this primarily to falling house prices and tightening credit standards.

    Extraordinary demand growth from Asia, mainly China and tightening global supplies have driven oil prices progressively higher throughout the decade. Supply blows have played a significant role, not least the Iraq war, which crimped that country’s oil supply for years. But the main factors behind the huge increase in oil prices has been rising global demand, a gradual flattening in oil output and the potential for more supply problems.

    “Previous oil spikes have been caused by a shock to supply, but you don’t have that this time,” said David Kirsch, who heads the market intelligence service at consultancy PFC Energy in Washington. “What you have is very strong demand that’s pushing upstream capacity to its limit. As prices get higher, we’re not seeing a decrease in demand, we’re still seeing rapid development of the world economy fueling demand for oil.”

    Crude oil prices last reached an inflation-adjusted high of $102.81 in April 1980, according to monthly averages of cash prices provided by the St. Louis Federal Reserve. (Nymex crude futures didn’t begin trading until March 1983).

  93. Part II

    World Economy Surviving Oil’s Rally
    Despite the continued grind higher, what’s perhaps been most surprising about this oil rally is the extent to which the world has weathered it. Developing regions seem to be taking galloping oil prices in stride through a mixture of economic growth and subsidies. More industrialized nations aren’t feeling the pinch as much as they would have 20 or 30 years ago, because they run their economic engines more oil-efficiently.

    “The role of oil in OECD economies is diminishing, and is now concentrated in premium-use sectors, which are transportation and petrochemicals’ rather than power generation and heating, said David Fyfe, senior oil market analyst at the Paris-based International Energy Agency, the energy watchdog for the Organization for Economic Cooperation and Development.

    According to the IEA, the amount of oil OECD nations used to produce one dollar of real gross domestic product was halved between 1973 and 2002.

    The weak dollar has also played a role in oil’s climb and in the world’s ability to adapt to high prices. Since early 1999, the dollar has slumped 21% against the euro. While this is by no means comparable to oil’s nearly four-fold gains in the same period, it has meant many countries aren’t feeling the same pain when it comes to forking out for crude oil.

    The dollar fell to a five-week low against the yen Wednesday, helped by a U.S. manufacturing report that suggested activity contracted in December for the first time in 10 months. The greenback fell to a low of Y109.33, its lowest mark since Nov. 28. The greenback also declined against the euro, with the single currency pushing to a three-week high of $1.4751.

    “The depreciation of the dollar has softened the impact of the oil price on other major consuming countries,” analysts at the International Monetary Fund said in a Nov. 5 report.

    In nominal terms, oil prices are up some tenfold from their 1990s intraday low $10.35 a barrel, reached in December 1998. As an investment, crude has far outperformed the Dow Jones Industrial Average and gold over all those periods. Copper, driven by a similar demand surge, has matched or beaten crude since 2005 but not over the longer term.

    Amid Scarcity, Oil’s Price Floor Rises
    Analysts and industry experts caution that there are always unknowns with any long-term energy forecast, but many have become confident of the notion that there is now a higher long-term “floor” for oil prices. The major oil companies are making investment decisions based on whether projects make sense at $40-$50 per-barrel, as opposed to $20-per-barrel a few years ago, said Cambridge Energy Research Associates Chairman Daniel Yergin.

    “Whatever the floor is, we’re certainly in a new era as far as oil prices,” Yergin said. “In the early part of the decade, we were looking backward to the Asian financial crisis. Now we’re looking forward” to a world marked by strong energy demand, increased political risk and rising operating costs — and complicated by a weaker U.S. dollar, and uncertainty about the U.S. economy,” he said.

    Weatherford International Ltd. (WFT) Chief Executive Bernard Duroc-Danner likens the world’s global oil resource base to an athlete that has reached middle-age and requires more maintenance to perform. In terms of oil-industry dynamics, that means it costs more money to produce less oil.

    “The underlying resource base is older, less able to grow and there isn’t any spare capacity,” Duroc-Danner said.

    In terms of oil prices, this shift means $40-$50 per-barrel in the new era, as opposed to a range of $14-$22 in the previous one, Duroc-Danner said.

    A price lower than $40 is possible, but not likely, he added.

    There have been political factors in recent years that have depressed oil output also and which show no signs of abating. These include languishing oil production in Venezuela due to an overhaul of national oil company Petroleos de Venezuela ASA (PVZ.YY) under President Hugo Chavez, and the impact of the Iraq war, which depressed Iraqi output for years until this fall.

    Without endorsing the notion of “peak oil,” some leading oil companies have begun describing petroleum resources as increasingly constrained. These include ConocoPhillips (COP) and Chevron Corp. (CVX), whose chief executive, Dave O’Reilly, declared famously in 2004 that “the time when we could count on cheap oil and even cheaper natural gas is clearly ending.”

    There is precedent for a permanent upward shift in prices. Prior to the Arab oil embargo in October 1973, oil prices traded for just a couple of dollars per barrel, before immediately increasing fourfold.

    The embargo came on the heels of a dramatic period of global economic growth that saw oil consumption jump from 21.3 million barrels a day in 1960 to 57.2 million in 1973, according to data from the U.S. Energy Information Administration. The Organization of Petroleum Exporting Countries was first formed in 1960, but didn’t emerge as a meaningful influence on prices until after 1973. While oil prices have tumbled sharply a few times, especially in 1986 and 1998, they’ve never dropped to pre-1973 levels.

    Analysts point to demand and supply factors as supporting another permanent shift in prices. The EIA currently estimates that China’s oil demand will grow from 6.4 million barrels a day in 2000 to 10.5 million in 2015 to 15.7 million in 2030. While that increase could ebb for a variety of reasons — including a move by the Chinese government to scale back fuel subsidies — analysts liken the shift in Asia to the systemic increase in energy consumption by the OECD countries in the twentieth century.

    (Gregory Meyer and Riva Froymovich in New York contributed to this article.)

    —By Matt Chambers, Dow Jones Newswires; 201-938-2062; matt.chambers@dowjones.com and John M. Biers; Dow Jones Newswires

  96. Sambone: I agree with everything in part I

    Scoop: APA and SU have the highest degree of leverage to oil but everything will see pullback, especially higher multiple service like SLB and CLB. This should take a few weeks to unfold and my great preference would be to see oil not break $100 and instead to slip quietly to the mid $90s as we approach 4Q results…that way, the focus will be on individual company dynamics and not mob sentiment based on price.

  101. We didn’t see a lot of big deals in E&P land in 2007. I should have added to today’s post (and will soon) that the big deals seen in 2006 will likely be echoed in 2008. There is a growing divergence in multiples of large cap vs mid and small cap firms in some cases that will provide an easier (lower finding and development and earnings accretive) path to reserve additions via corporate vs property acquisitions. Firms like TLM have got to be a target.

  112. Z: FTI is trailing the group. Any clues? Do you see it as a deepwater play or a broader service play?

    ps. HAL *did* get jiggy 🙂

  113. FTI – no clue why not following better, kind of see it as general and they’re also into other stuff which I have no clue about (food processing, cooking systems).

    HAL pretty jiggy, same SLB.

    OII has left the station, CAM running too…FTI often runs with them but sometimes a bit of a delay.

  116. Z – As we approach earnings season, are you going to develop a table that shows company’s, est eps, and release date?

  117. Apparently the reporters on Bloomberg were as bad as the CNBC mob at hyping today’s action – they were literally screaming for $100 apparently citing disturbances in the Hardcourt Port area.

  118. Ram – absolutely, its a little early for the dates yet but I’ll have a table with the other stuff out soon.

    N – now that’s funny.

  126. N – Had a discussion with another guy and my point was that as the Fed lowers, inflation will go higher and that’s not good. His point is that if one of the following happens, the market/economy will be OK. 1) Government spending (My point was how long can we continue to borrow? His point was the lower $ helps, so why worry). 2) Consumer spending (Well, that’s dead now). 3) Corporate spending (See pre Y2K spending). 4) Overseas investments (His take is that is what is happening now, and that nothing to worry about).
    Just thought that you would want to know what the bulls are saying.

  127. Part I

    3:31 pm EST

    $100-A-Barrel Oil May Soften US, World Economies

    By SUDEEP REDDY
    Of THE WALL STREET JOURNAL

    Oil prices only briefly touched $100 a barrel on Wednesday, but a prolonged stay at that level could soften the world’s strong economic growth and threaten a U.S. economy already weakened by an ailing housing market and increasingly cautious lenders.

    Higher oil prices would also test the progress made by many of the world’s industrialized economies toward greater energy efficiency since the oil shocks of the 1970s and early 1980s.

    Crude-oil futures hit $100 a barrel for the first time in a single floor trade at 12:09 p.m. EST in the New York Mercantile Exchange’s benchmark February contract, before pulling back to settle at $99.56 a barrel, up $3.58. A spokeswoman for the New York Mercantile Exchange said the $100 trade was legitimate.

    In the U.S., which remains the most oil-dependent industrialized nation, oil at $100 would threaten consumer spending, which accounts for more than two-thirds of U.S. economic activity and is already expected to soften as home values decline. Oil’s rise is sending up the price of gasoline — the most visible price in the U.S. economy — and that has major impact on consumer psychology. Readings of consumer confidence have been weakening recently.

    “If oil stays at the price it’s at, you could see gasoline prices at $3.60 or $4.00 a gallon, which is absolutely frightening,” said Paul Ashworth, senior U.S. economist at Capital Economics, a London-based research firm. “It’s going to have a fairly devastating impact.”

    That impact could ripple through other economies. Asia’s rapidly developing nations have flush cash reserves to continue subsidizing fuel for its population. But China’s 10% rise in government-controlled fuel prices shows higher oil costs are putting a greater strain on Asian nations. Also, China in particular is heavily dependent on consumer spending in the U.S. Should higher fuel prices curb U.S. consumer spending, China — the U.S.’s factory floor — would suffer.

    Europe is also better-equipped to withstand oil at $100 a barrel near-term, in part because oil makes up a smaller part of the price of diesel and gasoline due to high taxes. More significantly, the price of oil is rising less sharply measured in euros and pounds rather in weakening U.S. dollars. But the European Central Bank measures its success by the path of inflation including food and energy prices. With energy pushing inflation higher, the bank could be more reluctant to cut rates to resuscitate a slowing economy than its U.S. counterpart, the Federal Reserve.

  128. Part II

    The Fed puts considerable weight on inflation before energy and food prices. But it, too, faces a dilemma. Until recently Fed officials downplayed the inflationary impact of higher energy prices, noting inflation excluding food and energy had edged lower. And consumers’ and investors’ long-term expectations of inflation, as revealed by surveys and bond trading behavior, have remained relatively stable.

    But Fed officials recently have signaled a rising degree of discomfort with the inflationary implications of energy prices. The statement accompanying their last interest-rate move said that, along with higher prices for other commodities, energy prices “may put upward pressure on inflation.” Those concerns suggest the Fed feels little latitude to lower interest rates to cushion the shock of steeper fuel bills, since doing so could aggravate inflation.

    Economic forecasting firm Global Insight says that, in the U.S., each additional $10-per-barrel increase in oil price raises gasoline prices by roughly 19 cents a gallon, cuts growth in consumer spending by a third of a percentage point, reduces employment by 100,000 and adds one-half percentage point to consumer price inflation. Those factors combined will subtract two-tenths of a percentage point from the already slow 1.1% pace of growth the firm expects for the first half of 2008, Global Insight says.

    Growth in consumer spending slowed from an inflation-adjusted annual rate of 4% in the first quarter to about 1.4% in the second quarter as gasoline prices climbed in the spring and early summer, then rebounded to 3% in the third quarter. Economists now anticipate a slower fourth quarter, though not as slow as they feared earlier. Macroeconomic Advisers, a St. Louis forecaster, estimates that consumer spending increased in the fourth quarter at a 2.8% annual pace.

    “If gasoline prices go up, that means less to spend on everything else,” said David Greenlaw, Morgan Stanley’s chief U.S. fixed-income economist. “Whatever you get on gas prices eats into other forms of consumer spending.”

    Rising energy prices haven’t harmed the U.S. economy as visibly as they did three decades ago, in part because of the economy’s improved ability to absorb the shock. Manufacturers are more efficient. Vehicles get more out of every gallon of gasoline. Airlines and other transportation companies maintain aggressive programs to reduce their fuel expenses.

    “The economy has performed well in the face of a huge run-up in energy prices,” said Greenlaw.

    The big question is whether that can continue. “Manufacturers try to absorb these things through productivity,” said Norbert Ore, a purchasing executive at Georgia-Pacific Corp. who chairs a manufacturing committee for the Institute for Supply Management. “They try to avoid raising prices as long as they can, as long as existing inventories are in place, and to try to offset any short-term incursions we see in oil prices.”

    When they can, however, companies try to pass along oil prices by raising prices of everything that relies on petroleum-from plastics to tires to prescription drugs to airfares. That’s usually easier to do at times when the economy is booming, but it’s also harder to avoid even in a sluggish economy if oil prices keep rising.

    To the extent that oil prices are driven by surging demand in China, India and other developing economies, there is an offsetting benefit to the U.S.: a ready appetite for some U.S. exports. That makes an oil-price surge like this one, which is largely driven by demand, different from one caused by supply shock like those of the 1970s.

    Few economists and businesses, however, expect oil prices to continue rising indefinitely. They say consumers eventually will respond to price increases by cutting back consumption through less driving, greater efficiency and a switch to alternatives.

    “The cure for high prices is high prices,” Ore said.

    —By Sudeep Reddy, The Wall Street Journal

  129. I hear ya Samborne. My take is cut rates to zero right now and lets see how much good it does! See Japan with zero rates for the last 10 years and still the worst performing stock market this year.

  130. The current manufacturing contraction will be limited if we maintain a weak dollar. We are currently on the down side of a seven year itch when it comes to heavy manufacturing. Seven years ago there were massive layoffs and plenty of built inventory and no buyers. Europeans and Asians are currently preventing another downdraft.

  131. Ram – What heavy manufacturing? I didn’t think the US had any left. I thought that all the jobs were either healthcare or Walmart/Starbucks.

  140. The Heavy Construction guys, Ag guys, Aerial guys, Truck mounted boom guys. Then there are the cylinder, weldment, maching etc that support the OEM’s. It is still huge and important to our economic engine.

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