May 1999 Vol. 220 No. 5  Editorial

Thomas R. Wright, Jr.,  Editorial Director

Whither oil prices?

Now that oil prices have improved significantly from their morose levels late last year, we’re starting to hear more price forecasts, some of which are very bullish. And obviously, this is quite a change from the pessimistic projections that emanated from a few of the major oil companies at the start of this year. You remember, don’t you? We do — at least one large oil company saw world oil prices staying around $9 per barrel for the next three years.

We also remember two lonely voices singing a totally different tune from the rest of the choir. One was Matthew Simmons of Simmons & Company International (Houston), who, incidentally, does not make price forecasts, but does study supply / demand fundamentals and warns of impending changes. The other was the Houston consulting firm Groppe, Long & Littell which did issue an optimistic price forecast just as oil prices hit bottom.

Simmons was one of the first to publicly zero in on the "missing barrels" phenomenon, telling us that there has to be a problem with the world supply and demand statistics issued by the International Energy Agency. Basically, his view was that these erroneous statistics caused NYMEX speculators to bid down the price of oil to unrealistic levels.

Meanwhile, Groppe, et al., were analyzing the IEA numbers (as they had in the past) to determine why the supply / demand figures were out of whack and to estimate the correct numbers. In a nutshell, they found evidence indicating that IEA volumes were too high on the supply side and too low on the demand side. And as a result, they stated that the price for WTI crude (West Texas Intermediate) could reach $20 per bbl by mid-year 1999 — and that was before OPEC announced its March agreement on production cuts. Now, Groppe says that WTI in the U.S. could get to $30 per bbl by year-end 1999 if OPEC adheres to these production cuts. (Look for an article in next month’s issue detailing this statistical analysis.)

Separately from the above, two more consultant / analysts also predict $30-per-bbl oil by the end of this year. Michael Economides and Ronald Oligney (both of Houston) cite severe U.S. production capacity losses from the recent low prices, plus high costs of developing new capacities in the exporting countries as the price stimuli.¹ These authors say the exporters need at least $20 oil before they can expand capacity.

The Energy Information Administration (EIA) of the U.S. Department of Energy said last month that it expects world crude price (average cost of imported oil to U.S. refiners) to be about $15 to $16 per bbl by December 1999. This would translate to about $18 WTI. EIA thinks world petroleum demand will continue to increase as production retreats. "This should undo much of the excess accumulation of oil in storage seen over the last few years."

However, EIA sees WTI crude prices rising to only $19 by the end of 2000. The agency is more pessimistic about OPEC’s resolve, saying, "Just as the previous two agreements to cut production were only partially implemented, so these most recent cuts are also likely to be."

Pessimists, too. Daniel Yergin of Cambridge Energy Research Associates, speaking at a National Ocean Industries Association meeting in March, said WTI will run about $14.50 to $15 per bbl this year, even if OPEC’s agreement holds. Besides being skeptic about OPEC’s resolve, Yergin doesn’t see demand rising much this year.

Salomon Smith Barney, while raising their earlier forecast, also is less enthusiastic. The firm is using $15 per bbl (WTI) for 1999, up from their original $13. They see $17 oil in 2000, as opposed to prior estimates of $14.50.

Dale Steffes of Planning & Forecasting Consultants (Houston) wants to be on record with a forecast of from $12 to $13 per bbl (WTI, in ’98 dollars) for the next ten years. He says that there is much more growth potential in world oil production than in consumption. "The current voluntary cutback in production has raised the oil price short term. However, this price signal provides for additional world oil exploration, something the producing countries do not want or need. They cannot have both high prices and high volumes."

Finally, the most foreboding forecast we’ve seen comes from The CIT Group’s Equipment Financing business unit in Livingston, NJ. Michael Paslawskyj, VP of Economic Research, says oil will drop from an average of $11.35 per bbl last year to $11 in 1999, then increase to $12.10 in 2000. Paslawskyj also is an OPEC skeptic and doesn’t see much of an increase in world demand.

So, what’s this all mean? Considering the wide diversity — you might as well flip a coin. However, we like Groppe, Long & Littell’s guess for several reasons. Their analysis disproves some of the "conventional wisdom" about supply / demand statistics that has gotten this industry into so much trouble in the past. Secondly, they predicted (correctly) a substantial turn-around when everybody else was seeing continued gloom. And finally, $30 oil just sounds good.

The merger of BP and Amoco (and now possibly ARCO) has spawned a flood of facetious riddles among those affected, especially Amoco personnel. Some we’ve seen include:

How do you pronounce BP Amoco? — BP, the Amoco is silent.

Who is the company’s new CEO? — Sir John.

Who is the company’s old CEO? — Sur-Render.

What do you call Amoco managers? — Sur-Plus.

Which people still have jobs? — Sur-Vivors.

And, what are their jobs? — Ser-Vants.

Why did Sir John want ARCO? — So he could call the company BP Ar(co)Am(oco) Co., or ultimately, BP Aramco.

The latest poll of thousands of high school students from all over the U.S. reveals that 76% of them think that Bill Clinton’s nickname is "the Vice President."

1. Economides, M. J., and Oligney, R. E., "Looking at $30-a-barrel oil by end of the year," Houston Chronicle, April 4, 1999.

Copyright © 1999 World Oil
Copyright © 1999 Gulf Publishing Company