Analysts agree world oil markets face short-term instability

By the OGJ Online Staff

HOUSTON, Sept. 12, 2001 – Analysts said Wednesday that terrorist attacks on the US will keep world oil markets unstable in the short term, although supplies are adequate.

The threat of either US sanctions or a physical retaliatory attack against any country that aided Tuesday’s terrorist attacks is certain to stimulate concerns about Middle East oil supplies that could drive up market prices, said Michael C. Lynch, chief energy economist at DRI-WEFA Inc.

“You got to figure for a couple days things are going to be a little crazy before things settle down. It looks like the Organization of Petroleum Exporting Countries has done a good job of stepping in and calming markets, which should help the crude price,” he said.

“I’ve been seeing all these reports of gas stations jacking up the price but I think that’s like a 24-hr phenomenon. They will realize there is not really a problem with gasoline supply and price will come right back down.

“On the other hand,” he said, “there is a question whether the oil industry will become nervous and increase inventories. That is the sort of thing you saw in 1979 for example after the Iranian revolution was over. People were still nervous and they kept buying oil and filling up their tanks, and that kept demand high for awhile.”

Lynch acknowledged, “You might see something like that for the next few months. As long as there is political uncertainty, there is always going to be concern that something may happen that might affect the supply of oil and it might be a better idea to keep your inventories 5%, 10%, or 15% higher.”

Such hoarding could keep pressure on the oil markets, in a situation where OPEC would be less willing to increase production, Lynch said.

“Some like the Saudis may get nervous and say, ‘Look, you don’t really need the oil to meet consumption. You are just putting it into storage, and we don’t want that, so we are going to trim supply a little,'” he said.

If that situation were to develop, Lynch said, prices for US benchmark oil futures could exceed $30/bbl.

Meanwhile, the suspension of all civilian air traffic has reduced US demand for oil by 1.8 million b/d, or almost 10% of its total, said Adam E. Sieminski, global energy strategist for Deutsche Banc Alex. Brown. But that won’t last long, of course.

“Longer term, demand concerns hinge on an exacerbation of the current global economic slowdown driven by a loss of consumer confidence. Every 1% loss in expected global GDP growth takes about 400,000 b/d away from expected oil demand growth,” he said. “Prior to the attacks, our economics team downgraded its US GDP growth forecast from 1.7% to 1.2% for 2001 and from 2.6% to 1.6% for 2002. While we don’t think this would have a major impact on 2001 demand growth, with basically only the fourth quarter remaining, we estimate that a 1 percentage point drop in 2002 GDP growth could mean 100,000 b/d, or 50%, less growth than our current expectation of 200,000 b/d in 2002,” said Sieminski.

This week’s terrorist attacks will likely increase US desire for energy independence, “particularly for supply,” Sieminski said. “This could mean more political support for a gas pipeline from Alaska and increased drilling from restricted land in the western US, the Gulf of Mexico, and perhaps even the Arctic National Wildlife Refuge coastal plain in Alaska, he said.

“We believe the attacks could lend momentum to a move toward increased automobile fuel economy and other measures designed to promote conservation and efficiency,” said Sieminski.

Wacky markets
There is no way to predict which way the oil market will go in the immediate aftermath of the disaster, said Matthew Simmons, CEO, Simmons & Co. International.

“Anytime you get an unexpected event in the wacky energy markets, the 100% speculation on the NYMEX means it could go way up or way down,” he said. “It’s just one more element of volatility to the far too volatile energy market.”

The problem is too many people look at the reaction on the NYMEX and then worry later about the real fundamentals of the market.

But one short-term fundamental concern is the consumer reaction to the tragic events of Tuesday. If consumers get “scared” by the event that could push the country into a recession similar to what happened in 1990 before the Gulf War, Simmons said. At that time, people were concerned about a long protracted war like Viet Nam, he recalled. It was enough to sink the country into recession. If consumers react negatively, it could be enough to cause a recession and have an obvious negative impact on the demand for oil, he said.

However, on the supply side another fundamental worry concerns the “retaliation” by the US on who did it.

If it turns out to be Iraq, it will be difficult to make up for its 2.5 million b/d, he said.

“It’s a pipe dream that we can replace that,” Simmons said. “We have never been more exposed than we are today.”

Simmons said that motor gasoline stocks are almost at an all time low and heating oil inventories are at a historical low even though there is more inventory going into the winter than last year.

“We drained European stocks to make sure we had inventories here,” he said.

In terms of the supply side of oil, non-OPEC production stood at 43.2 million b/d in 1998 by the third quarter of 2001, which was up to 44.4 million b/d. But 1.3 million b/d of that increase was attributed to Russia.

“Non-OPEC production outside of Russia was down 100,000 b/d after 3 years of the highest prices in decades,” he said. “This is the first time of 2 full years of an unbelievable price explosion. We had no supply response.”

Simmons says the nation has no “cushion” of energy supplies should the US have to do something that “threatens the supply of oil.”

“We should never have let our cushion go away,” he said.

Demand dropoff
A different viewpoint from John S. Herold suggests the tragic events will be an overall negative on oil prices because the analyst doesn’t see any supply side disruption. Demand will falter following an initial but shortlived “rally” of prices, said Aliza Fan, vice-president, John S. Herold of Houston.

“When the market opens in the coming days, there will be a significant rally in crude oil commodity backed by concern for supplies and possibly a war especially if it involves a Middle Eastern country,” said Fan.

But looking at the longer-term ramifications and fundamental impact on crude oil, there will be a slowdown in global economy greatly affecting prices, she said.

“This won’t be positive for prices,” Fan said.

The uncertainty on the demand side especially on a global basis will be a negative.

“OPEC will step in to alleviate pressures on supply,” she said.

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