Monday, October 24, 2005

Oil prices are headed... that-a-way <--->

Reuters: Oil guru says crude could hit $190 this winter.

The title should really point out that he talks about natural gas or oil.


Consumers should brace for crude oil and natural gas prices possibly doubling or tripling this winter, Matthew Simmons, a best-selling author and oil-supply bear, said on Wednesday.

"Prices are really cheap today and they need to go a lot higher, and they probably will go a lot higher," Simmons said in Ottawa.

"I am very concerned, given the destructive damage done by (Hurricanes) Katrina and Rita, that the United States must be closer to starting to see significant product shortages than we've seen since 1979."

Too much got destroyed and too little has been brought back on stream, the Houston-based analyst said.

He also said that cold weather this winter could bring a very high risk of natural gas curtailment in the United States.

"Either one of those events (oil product shortage or natural gas shortage) could send prices two to three times higher than they are today," he said after a speech in Ottawa.

That could translate into natural gas prices of $40 per million British thermal units from more than $13 now, he said. Doubling or tripling crude would put it in the range of $125 to $190 per barrel.

"Everyone keeps thinking there is a (price) ceiling...There is no ceiling," said Simmons, who wrote in his book "Twilight in the Desert" that Saudi oil output is at or near its peak.

He said he has seen little sign that higher prices so far have done much to reduce consumption.

Simmons said supplies of heating fuel oil were in okay shape, but could drain fast if the weather turned cold. Diesel is tight and shortages of jet fuel had caused some planes to be diverted from some airports.

"It's going to be painful for people to get used to actually paying real money for a really valuable resource," he said.


WSJ: Slowing of Demand Means Crude May Stay Below Peak for the Year.


With so much oil and gas production still offline in the Gulf of Mexico and refineries working to restore operations, crude-oil prices remain subject to considerable daily volatility. Still, many oil analysts say prices are much more likely to fall to the mid-$50s before rebounding to the $60-$65 area for the rest of the year, than retest record highs.

"We could remain weak into early November," said Jim Ritterbusch, president of Ritterbusch & Associates, a consulting firm in Galena, Ill. "By late November and December, crude should move back toward the mid-to-lower $60s."

The main force behind the pullback has been sluggish demand. Just as robust global demand sent oil prices soaring in the past two years, signs that consumption has started slowing in the aftermath of Katrina-influenced $3-plus gasoline prices at the pump have driven prices down, both for oil and refined products. Essentially, high energy prices have hurt high energy prices.

"The theme is ongoing -- you're starting to see consumer resistance to higher prices," said Mike Fitzpatrick, vice president for risk management at brokerage house Fimat USA in New York. "Maybe you weren't seeing it at $45 or $50, but at $60 and higher you start to see a ripple-out effect."

There is little disagreement among analysts that demand has slowed in recent weeks, as some motorists have cut back on discretionary driving or have switched to alternative means of transportation, including mass transit. Just how deep-seated this so-called destruction of demand remains open to debate.

"We're already seeing gasoline demand start to bounce back," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "I think once we get over the seasonal weakness, people will start to realize that supplies are still tight and the market is still very vulnerable to big rallies."

Mr. Flynn, one of the most consistently bullish market analysts, predicts oil prices setting a record of $75 before the year is out, putting him in the minority camp. Mr. Ritterbusch, of Ritterbusch & Associates, while not as bullish, said the onset of winter will push prices higher again.

"We're getting set up for a strong heating-oil market," he said. "Recently, we have seen gasoline push the market lower. By next month, I expect heating oil to pull the market higher."

Mr. Ritterbusch thinks crude oil has seen its highs for the year, although he added: "I can't say the same about next year."

Seasonality doesn't favor the bulls. In 12 of the past 16 years, heating-oil futures have peaked in early October and then sold off into March, noted technical strategist Walter Zimmerman of brokerage house United Energy.

"This is an extremely unlikely time of the year to be thinking about new highs," he said. "By far the most common occurrence is that your winter-demand rally does not exceed the preseason-rally peak."

Resource Investor: Oil Forecasting Legend Discusses Peak Oil, Share Prices.


Unlike some other well-followed thinkers on the subject, Groppe doesn’t see prices exploding to over $100 a barrel, nor is he quite so concerned about the reserves of OPEC members such as Saudi Arabia.

Groppe believes that, “we are at the point where production is peaking and the price required to restrain consumption to match this future available supply is in the 50-60 dollar range on an annual average basis…This or next year might very well be the all time peak year in world liquid petroleum production.”

His view is that, “it’s going to be essential to achieve reductions in consumption because we're forecasting no continual increase in total world oil supplies in the future.” Groppe estimates that, “a price range of $50-$60 a barrel is going to be required in order to in effect cause no growth in total world oil consumption. That we think will be the composite of continuing but slower growth in transportation fuel use of oil, because that consumption grows essentially with the vehicle population in the world. With higher prices there will be pressure toward more fuel efficient vehicles and we’ll see actual consumption decreases in fuel oil where all you’re after is a source of heat, and that’s the way the system will balance itself.”

Groppe finds himself sort of in the middle in terms of the prevailing views on the future, both optimistic and pessimistic. He stated that, “Matt Simmon's view is that we're just on the verge of seeing very significant depletion decline rates and total world oil production will then decline precipitously and were approaching the end of the world economy as we've known it. Major oil companies take the view that it will be relatively easy to continually expand oil production, specifically, they all agree that world oil production can be expanded 50% in the next 25 years and we disagree very strongly with both of those viewpoints. We think there will be a flattening of total oil supply and the high prices needed to constrain consumption to match that available supply.”

From an investment standpoint the answer still seems clear – energy stocks should continue to move higher despite corrections and volatility along the way. Groppe thinks investors need to hold their ground and not be phased by short-term price swings such as those we’ve experienced recently. His advises that, “if you believe in these fundamentals and the type of future pricing environment that I’ve described you need to ignore these short-term variations in equity prices with the fluctuations in oil and gas prices. I've given you my view on the average annual long-term prices, but since you have both of these very important industries [oil and gas] essentially operating at capacity and you've got all kinds of unpredictable events that occur all year long...there will be significant continuing volatility from this point forward and that just needs to be ignored as long as fundamentals remain intact.”

Groppe has 90% of all his equity investments in energy, and 65% of that is in Canadian energy stocks.

P.S. I tend to agree with Matthew Simmons on natural gas - it could possibly spike this winter, and Henry Groppe on oil - $50 - $60 seems to be a range the market 'likes', meaning it's not high enough to bring everything to a halt (like $190 would), but is high enough to curtail some amount of demand. And don't forget, OPEC's president said months ago that $53 was an 'ideal' price.