Oil's Aflowin' (But We Still Need More)

by Rick Olivere, CFA

3:52:00 PM September 22, 2000 GMT

The US energy secretary has announced the release of 30m barrels of oil over a period of 30 days from the 571m-barrel Strategic Petroleum Reserve. This does not address the ongoing imbalance between rising demand for crude oil and the limited excess production capacity of OPEC in the US or around the world. This increased oil on the markets is likely to reduce prices below $30 per barrel on a short-term basis. However, market prices for oil and crude oil supplies are still vulnerable to production or refinery disruptions and from a colder-than-normal winter.

Oil prices in the $28-$30 price range and natural gas prices in the range of $4 per million cubic feet still generate net income at better than expected levels that are likely to strengthen the outlook for a multi-year cycle of drilling activity. We believe that any resulting weakness in energy shares related to this band aid energy policy increase in available supplies of oil is an opportunity to buy energy and energy service shares. Click here for our purchase recommendations.

Similar imbalances between rising demand for natural gas, flat production of natural gas, and inventories below those a year ago are likely to sustain natural gas prices above $4 per million cubic feet (mcf). Below-normal winter temperatures could drive oil prices above $40 per barrel and natural gas above $8 per mcf.

The International Energy Agency estimates that OPEC has sustainable capacity to produce 31.4m barrels of oil. This is only 2.2m barrels per day more than production according to the Oct. 1 quotas. Of this amount, Saudi Arabia has excess capacity of 2m. Put another way, nearly all the excess producing capacity is in one country. This excess is less than 3% of daily global consumption of oil.

President Ford created the Strategic Petroleum Reserve in 1975 as the nations first line of defense against an interruption in petroleum supplies. The oil is stored in underground salt caverns in Texaco and Louisiana near the Gulf of Mexico.

http://www.ideaadvisor.com/article/article.asp?aid=5262

-- Martin Thompson (mthom1927@aol.com), September 22, 2000