Tuesday, June 9, 2009
Cheap Oil and Shares
"Rising oil prices, believes Ali al-Naimi, Saudi Arabia's oil minister, may soon 'take the wheels off an already derailed world economy.' ... Indeed, at a recent summit of oil grandees covened by the Organization of Petroleum Exporting Countries (OPEC) it was hard to find anyone who did not expect a price rise to rival the giddy leap to $147 a barrel last year. ... On the face of things, this concern is absurd. The plunge of $115 in the price of oil from its peak last July to its nadir in December was the most precipitous the world has ever seen. ... Meanwhile, oil firms are not pumping nearly as much as they could. ... Despite this growing glut, however, the price of oil has been rising steadily in recent weeks. ... On May 20th it closed above $60 a barrel for the first time in more than six months. ... Oilmen are worried because they believe thay many of the factors behind the record-breaking ascent last year remain in place. ... So oil firms must work doubly hard to replace declining fields and to increase output. ... Yet the oil industry is short of equipment and manpower, thanks to decades of underinvestment in the 1980s and 1990s, when prices were low. That left it struggling to expand despite the strong price signal of recent years, and thus poortly positioned to cater to vast new markets in the developing world, including China and India, where oil consumption has been growing fast. ... Oil boses, OPEC ministers and anxious bankers all agree on what is needed to prevent this scenario from becoming a reality: lavish investment in the devlopment of new fields and in exploration. ... On London's Alternative Investment Market [AIM], a magnet for speculative ventures in natural resources, oil firms managed to raise just Pound23.6m ($37m) in the final quarter of last year, compared with Pound229m in the previous quarter", my emphasis, Economist, 21 May 2009, link: http://www.economist.com/PrinterFriendly.cfm?story_id=13693010.
I think oil and oil field service shares are cheap at current levels. Oil companies finding it difficult to raise money at AIM, I see as a good sign. Disclosure: I own oil and oil field shares. Agreeing with McKinsey here, I expect oil prices to rise. I recently attended a University of Chicago GSB oil indistry conference that had a McKinsey director as a panelist. He seemed to be the only panelist who understood oil industry economics. He was the prototypical McKinsey consultant, prepared, educated and smart as they come.