Crude oil is hovering around the $84 mark, and the U.S. Energy Information Administration is out with a bearish report on oil prices going forward. What is Wall Street thinking on oil--and is it a buy or sell proposition?
The EIA report -- and a similar one from the International Energy Administration -- seem like good news for global energy consumers, but they are worrisome for investors:
In its most recent 2012 forecast released on May 8, the EIA says that the price of crude oil will fall, on average, $2.50 per barrel compared to April’s forecast. While the EIA still expects oil to average about $104 per barrel before the year is out, the agency expects “flat growth” for oil prices in 2013.
This from the EIA report:
The EIA’s current forecast of the average U.S. refiner acquisition cost of crude oil in 2012 is $110 per barrel, which is $2.50 per barrel lower than in last month’s Outlook, but still about $8 per barrel higher than last year’s average price. EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $104 per barrel in 2012, about $2 per barrel lower than the forecast in last month’s Outlook, but $9 per barrel higher than the 2011 average price. EIA expects crude oil prices to remain relatively flat in 2013.
Last week, oil was trading at around $84, at its lowest level since October 2011.
Analysts generally assign softer oil prices to a weakening global economy, especially new debt troubles in Spain (along with a bailout plan that failed to pacify global investors), tepid job numbers in the U.S., and weaker economic data in China and India--all of which has forced oil demand down, leading to a 14% decline in crude oil prices in May 2012--off 25% from 2012 highs.
Some analysts say the free fall in oil prices has a ways to go before it hits bottom.
“There have been no 'game changers' this week," explains Julian Jessop, chief global economist for London-based Capital Economics, in comments to the Associated Press on June 8, 2012. "The prices of commodities should end the year much lower than they are now."
Others say that now that the lousy economy has been acknowledged, and factored into the equation, price declines should stabilize. That’s the sentiment from a research report out mid-June from Barclays, which says that oil prices should even out going forward -- barring, of course, any further calamities in the Eurozone, or any bombs falling in the Middle East.
One problem that isn’t going away any time soon is the costs oil companies are now incurring in extracting oil from the ground.
Ten years ago, when oil companies were engaged in the relatively simpler task of drilling oil out from under the sand in the Middle East or West Texas, those costs were about $20 a barrel, and about $50 just before the global recession hit in 2008, as extraction costs began to rise.
Four years later, those costs have nearly doubled, according to the Vienna-based energy analytical firm JBC Energy, thanks to the rising price tag of digging oil out from under deep-sea reserves. JBC estimates that extracting oil from the most expensive wells now costs about $100 per barrel.
Another factor that could send oil prices upward again is the budget realities of oil producing states, particularly in the Middle East. The United Arab Emeritus needs to get $84 per barrel of oil exported to break even on its national budget. Bahrain needs oil to be well over $100 to balance its budget.
If prices continue to weaken, oil producing nations may have no choice but to cut production, reduce bloated inventories, and force the price of oil upward again. That’s a scenario more and more oil industry analysts expect to occur if prices remain flat throughout the summer of 2012.
Energy analyst Robert Rapier, in a June 11, 2012 research note on OilPrice.com, notes that oil prices should rise, but not as sharply as they have in recent years.
“Put all of those factors together, and I believe that oil prices will remain high, but that 2013 could see a lower average price than we saw in 2008,” he says. “The price for 2012 will almost certainly be above the $72.34 from 2007, but 2013 may not average the $99.48 seen in 2008. Further, I think it is unlikely that we will see prices spike as high in 2013 as we saw in 2008 when oil spiked to nearly $150 (barring of course major events like war with Iran or widespread unrest in Saudi Arabia).”
If he’s right, and oil prices rebound, that should signal a concurrent boost in the global economy, and should send oil stocks rising once again, analysts say.
Chris Kimble of Kimble Charting Solutions notes a solid correlation between rising crude oil prices and the S&P 500. “If history is a guide, in the short run, the S&P 500 could benefit from a rally in crude oil prices,” he says.
That’s also the tone sent by major Wall Street investment banks recently. Goldman Sachs, in an analyst report, says that oil is actually positioned well for price growth, and it won’t be long before the big institutional investors dive back into oil stocks and futures.
"Even against other assets, the selloff in commodities was exceptionally extreme, as the liquidation of length in the broad oil market, which started from relatively high levels, was the second-largest monthly decline on record," notes Goldman.
That hasn’t happened quite yet, although news of the Spanish bailout did trigger a brief rally in oil stocks earlier this week. But by Tuesday, big oil stocks like ExxonMobil and Chevron had already given back their gains, so now the real vigil begins.
Oil stocks should rebound, most analysts say, but that won’t happen overnight, or even during the next month or so--not with all the bad news coming out of this economy.