Interesting cover story in Business Week on "Why You Should Worry About Big Oil."
Before anyone leaps to the wrong contrarian conclusion, note that major business news weekly
cover stories are less effective contrary indicators (although they have all had their day in the sun).
Rather, it is
the mainstream press (more than the financial media) that tends to catch the
crescendoing top as a cover story.
For example, this Business Week story isn’t a breathless recap on why
Oil is so expensive ($75 and going to $200!); Instead, it discusses why
the large Oil Cos are vulnerable –despite the huge cash hoards and
record profits.
Graphic courtesy of BusinessWeek
Recall our prior discussions on Magazine Cover Indicators:
For single companies, it rarely works. See all of these Apple cover stories as an example.
On the other hand, it often works with politics; See the Howard Dean covers, as well as the shrill blonde harpy cover. Broader issues like "Tech is Back!" at Forbes was also a good tell. And of course, the grand daddy of magazine covers was Business Week "The Death of Equities".
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(There’s more after the jump.)
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Source:
Why You Should Worry About Big Oil
Business Week, MAY 15, 2006
http://www.businessweek.com/magazine/content/06_20/b3984001.htm
“BP uses a $20 per barrel oil price to “test” its spending projects—i.e. to decide whether to go ahead with drilling for oil.When reminded that oil currently sells for about three-times that figure, the BP investor relations person vigorously defended this $20 “test” price, noting that BP sees oil trading in a $20 to $35 a barrel range over the long haul.”
http://jeffmatthewsisnotmakingthisup.blogspot.com/2005/09/
why-we-have-oil-crisis-or-wait-til.html
as reported at
http://guambatstew.blogspot.com/2005/09/model-behaviour.html
I think the last think BP would want to do is assume a price of oil > $60pb, use this to justify a huge expenditure, only to see oil collapse. The risk is too great.
Higher oil prices may be here to stay, but BP is right to tread lightly into a growth spree based on what may be a profit bubble.
By the way, I thought this BW article was exeedingly good.
It seems like there is a popular consensus that oil will continue to rise – this makes me think it has a good chance of stabilizing or declining. It seems like all of the articles I read about oil (esp. from the Peak Oil cultists) mention only the factors that will contribute to its increase, mainly increased Asian demand and not as many opportunities on the supply-side.
Does anyone have any good articles/research arguing that oil will stabilize or decline in price?
Why You Should Worry About Big Oil
Why You Should Worry About Big Oil
Businessweek, May 15
(Via the Big Picture)
By Stanley Reed, with Christopher Palmeri in Los Angeles, Peter Coy and Rose Brady in New York, and Mark Morrison in Austin, Tex.
You’d think the Apr. 26 oil summit in Qatar wou
There is a reason the big oil companies trade at 11x earnings. the p/e has actually come down as the price of oil has rallied probably due to the disconnect between what the price of oil the underlying companies discount v the true price in the futures market.
In regards to Jason’s point on the direction, i think it’s totally up in the air. how do you properly value the price of oil on supply/demand? what is the war premium? ($30, $20, $10) what is the inflation premium? these variables are vital to the price but hard to quantify. remember what the commodities did when the PBOC raised rates by 30bps? if the Fed took the Funds rate to 6% in one bump, the price of oil would crater. on the flip side if they stop, the inflation premium could rise and drive higher. the war premium is the big X factor and could buoy the price for as long as we keep tensions elevated.
if the gov really wanted to reduce the price of oil, they’d balance the budget, stop the war hawk rhetoric and raise interest rates…. at least that’s my opinion…
Raw materials have gotten out of hand and China can’t export profitably.
Because of extreme liquidity and low rates many of its industries, which used to be profitable, have been overbuilt. Therefore, a huge amount of their loans are unperforming.
They are stuck between a rock and a hard place. They need materials to keep on going. Cheap materials to be more precise. They are currently reevaluating their peg to the US dollar. No matter what happens, they know the western consumer will be slowing and if overcapacity is an issue imagine when the exports slow! Hence, they need to boost internal demand. A boost in their currency would increase China’s purchasing power.
They are in negotiations with other countries, trying to get away from the US dollar. Asians have always liked gold. If they are to get away from the US dollar gold would make sense for obvious reasons.
At this point in the game, a 25% drop in the US dollar would probably help them get stronger while the US licks its wounds. Their loans are non performing anyway. A 25% drop in the US dollar would reduce their input costs by more than that (25% currecny gains + drop in western consumer demand) and could actually help them improve their margins and improve their loan books.
Greenspan gave China a gift: low rates and incredibly low credit spreads! They’ve built up their economy on the back of the American consumer. Amercian banks, with their excess liquidity, have been buying up 5-10% positions in Chinese banks. Do you think the US banking system will let China defalt on their loans now?
Maybe Bernake was right. It was a savings glut, an Asian savings glut. It’s now time for them to increase internal demand… what better way than by boosting their purchasing power with a stronger currency?
Up to now China has been playing its cards incredibly well. If the US had been cutting its dependency on oil since the last oil crisis, they could have focused less on the Middle East and more on the Far East.
A sign of the times:
Pimco has gone from Fed Focus to Global Central Banks Focus.
Oil is a bubble. $40-50 at peak demand might be logical. $75 are speculators and as Sir Big Shorts, the BP CEO said, their day of playing in the Big Game will ultimately screw these morons. Who knows when but it surely ain’t yet.
VF is totally right. And, as a shareholder of a major, I would be p*ssed if they had a hurdle rate above $20. They need to be fiscally responsible in a manic environment. They’ve all been through this cycle of boom and bust again and again. They know it all too well.
Thanks to Wall Street, you can all expect to work longer. Because……….they’ve convinced state pension, private pension and corporate pension funds to invest in these hard assets. And, some day, they will all be crushed. So, just after the whammy of a stock bubble in your pension post 2000, you get to turn around and get another commodity bubble courtesy of Wall Street.
You can’t beat the house if you aren’t educated. Even then, it’s a bitch. Investors need to be educated someplace other than Wall Street.
Remember that the headline price of oil is for high grade light, sweet crude. Not all projects produce that, and the heavy sour crude goes for less – sometimes substantitally so. I think that $20 is still _very_ conservative, but quite as bad as a misleading focus on headline oil prices might suggest.
While oil has typically been a global market, the Chinese have done many strategic deals to guarantee supply in exchange for helping to develop fields, build pipelines, etc. Certainly this has poteneial to create serious problems in the future.
IMO: no bubble, long oil
One thing I keep thinking of is this; oil companies have to replace and expand reserves to survive and replacing reserves now costs a whole lot more than it did just a couple years ago-this is a big deal in long term planning and something that everyone in media and government seems to forget.
Screw the majors, buy the services/drillers.
Oil is only a bubble if you believe the Saudis, or you believe in abiotic, or you’re sure there are no hurricanes coming to the GOM, or you’re sure Nigeria is on the path to peace and prosperity, or you think Putin would rather have fewer $ for his oil, or you believe in the tooth fairy – otherwise oil is not a bubble until you can get past those and other restaints in supply.
Of course, that’s without Peak – has anyone noticed that worldwide production has not gone up in the last 6 months? Hmm, that would sure make me think a little before I pooh-pooh current oil prices. Go take a look, especially at all the charts. And then we’ll smoke a pipe and talk some more….
Yep fatbear, the chickens are coming home to roost. Heard some idiot extolling the promise and virtues of biodiesel today: No mention that world production of all vegetable oils is about 600 million barrels annually (1.65 million barrels/day), about 1 weeks worth of oil usage; didn’t mention too that a fifth of the people in the world could starve to death if all those calories were converted into fuel instead of food.
At some point reality needs to strike; I mean really hard.
Nothing about global economic conditions has warranted such a strong rise in price of WTI or Brent or Dubai blend.
Above ground stocks have been building for some time now; demand has tapered off; world crude production has been sufficient to meet demand and then some.
There’s an unconscious tendency to work backwards from price to supply/demand and production, i.e. to think ‘price is high therefore a supply/demand imbalance must exist’ and from this discover ‘proof’ for what’s been presupposed rather than to grasp the speculative nature of pricing and divorce of price from fundamentals.
Such seperation is exactly what a bubble is.
A few here would do well to read this 1998 paper by peak oil advocate Matt Simmons re. futures prices determining spot crude prices ( http://www.simmonsco-intl.com/files/012798.pdf ) and understand that futures and options are paper barrels that are subject to liquidity driven pricing.
I wonder what kind of price China got for all those long-term contracts. They didn’t pay top of the market prices did they?
Also, the drop of production comes mainly in Venezuela and Nigeria is due to external problems (mainly chaos and ineffeciency). Also, don’t forget gas prices =/= oil prices.