OPEC Ministers Trying to Gauge How Far Oil Can Slip

Includes: CVX, OIH, OXY, SLB, USO, XOM
by: SA Eli Hoffmann

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

AHEAD OF THE TAPE: Out of Energy and OPEC, Vexed by Price Drop, to Debate Response

  • Summary: Oil prices have dropped $10/barrel (13%) since the beginning of August; oil is now up $5.21 (8.5%) ytd. Analysts and OPEC ministers alike are scratching their heads trying to figure out whether the current slide is the result of excess supply, a subsiding fear-premium, or simply a technical pullback in a bull-market. Possible reasons for the price-drop: 1) Iran now seems to be willing to suspend its uranium enrichment program, curtailing fears of a disruption to their oil supply. (Iran is OPEC's second-largest producer.) 2) Despite production below OPEC's 28-million barrel/day ceiling, demand has been slack for months. 3) The Middle East conflict, which could potentially have involved Iran, seems to have resolved itself. 4) A seasonal lack of demand due to; warm temperatures, the end of the 'driving season' (post summer vacation), and refinery maintenance. 5) The weakening U.S. economy means less demand for energy domestically, and abroad for nations such as China who export to the U.S. 6) BP's (NYSE:BP) Alaska pipeline-corrosion issues have proven less disruptive than originally feared. 7) Hurricane season is almost over. 8) Forecasters say El Niño is on its way, bringing warmer temperatures and lighter hurricane seasons. OPEC's formal meeting begins today: Ministers say they don't expect a formal decision to lower its ceiling, but are prepared to let output fall informally if further reduction in demand is detected.
  • Comment on related stocks/ETFs: Jim Cramer says energy is in a "free fall zone," and that oil will drop to $62/barrel. He's short Oil Service HOLDRs ETF (NYSEARCA:OIH) with a minimum target of $125 (it closed Friday at $131.44). Options trader Phil Davis is long OIH puts. Do great minds think alike? One factor the article neglects to mention is the Chevron's (NYSE:CVX) recent discovery (announced Sept. 5) of a mammoth oil field deep beneath the Gulf of Mexico (under 7,000 feet of water and 20,000 of seabed), which has been called "the biggest find in a generation." Of course even a huge reserve isn't enough to turn world energy markets around—it's not even enough to bring the U.S. close to energy independence. Of greater significance is Chevron's demonstrating their ability to recover petroleum at extreme depths; this may indeed tip the balance of supply and demand in the long term. The OIH ETF invests in oil-service companies such as drillers, well-site managers, and various oil-industry services. United States Oil Fund ETF (NYSEARCA:USO) is a commodity pool that invests in crude oil futures, gasoline, and other petroleum-based fuels. Big energy stocks like ExxonMobil Corp. (NYSE:XOM), Occidental Petroleum Corp. (NYSE:OXY), and Schlumberger Ltd. (NYSE:SLB) have also been hit by the price-slide. The following chart shows that pure oil has been hit harder by the recent downturn than has the oil services sector:

Oil Service HOLDRs ETF (OIH) vs. United States Oil Fund ETF (USO)
vs. Chevron Corp. (CVX) 6-month Daily Chart