The Oil Story According To Pescod

After what we saw today in the oil markets, we just won-
der if everything going on in the stock markets and com-
modity markets of late just isn’t one incredibly bad acid trip
gone wrong.

There are a lot of things that don’t always
seem to make sense. For instance today, we get the weekly
inventory report out of the United States which shows an
absolutely enormous increase of 7.2 million barrels of oil to
320 million barrels, according to the Energy Department.

That made it the ninth straight increase and while the inven-
tory was expected to increase, it was only by one million,
not seven.

On that kind of news, you would have usually expected
the price of crude oil to get swacked badly, but instead it’s
up. There was other news out there though that had people
for the first time in ages, a little bit hopeful. Out of China
comes the news (and in China, fuel demand has dropped
significantly) that China has lowered their interest rates for
the forth time in ten weeks, but this time they’ve done it in a
huge way...dropping their lending rate 108 basis points to
5.58%.

Yes, that’s dramatic and it doesn’t mean people will
actually go out and borrow money and buy things, but it’s
certainly an aggressive move.

If you are looking for good news though, it was another
report showing that energy demand is actually coming back
as last week they noted an increase of 510,000 barrels a day
being used by consumers. Maybe the lower prices will get
the consumer back to the pump.

We spent much of the last two days asking CEO’s of
companies, analysts, former analysts, and oil watchers one
question…“Where do they think the price of oil will be over
the next quarter, by July 1st of next year and by Christmas
of next year?” Because with so many oil and gas stocks so
beaten up, if there is a future…

One has to remember that of the dozen or so people we
talked to, many are in the oil business and would probably
hope to think their business would still be around, so they
are optimistic.

None of them had a crystal ball that pre-
dicted this credit crisis and many of them are in situations
where they admit they haven’t a clue what to predict and
some of them are in positions where they may have to
hedge their production and the like and imagine trying to
predict that at a time like this.

One thing many talked about, was the new President
Obama and while many of the oil guys have concerns about
what his alternative energy strategies might be, his tax poli-
cies and the like, they are huge admirers of the team he’s
put together to get the economy going again and big believ-
ers that if there was a team that could accomplish it, this is
the group


As far as predicting what next in the short run, there
were guesses anywhere from $45 and $60 with the argu-
ment being made that if OPEC this weekend does cut
production a little further, maybe we have seen the bot-
tom for a while.

As far as looking forward though, there was an amaz-
ing consistency to the group suggesting that by July 1st
they would expect to see $60 oil which isn’t that much
higher than today’s prices, but for the economics for
most oil companies, it would be significantly better.

As for Christmas next year, the group ranged between
$70 and $80 with a large chunk of the group settling on
the higher number and the reason for everyone to be
optimistic was “supply destruction.” Supply destruction
is getting a lot of talk these days because with the huge
drop in oil prices, oil companies around the world from
GazProm to PEMEX to particularly the North Sea, are
having projects delayed due to the credit crisis and
budgets slashed for exploration and if you don’t go look,
you don’t find.

While decline rates in the Mideast may only be 2% or
3% a year which helps make OPEC such as significant
force, many areas of the world such as the North Sea
have decline rates of as much as 20%.

With Mexico dropping 10% over the last year and Russian Oil ex-
pected to be peaking, the suggestion by many is that if
Obama’s team is able to encourage the economy and talk
consumers into believing there is a future and that they
will go out and spend on a bed, car or whatever to revive
the economy, it wouldn’t take much of an uptick in the
economy (provided of course it’s around the world) to
suck up what oil production did exist, even if OPEC did
start to turn on taps again a year down the road.

That was our terribly unscientific look down the road,
but needless to say there are a lot of different view points
out there. Tristone Capital came out with a 33-page re-
port today taking an in-depth look at what they see for oil
over the next year and are big believers that the reces-
sion is going to be deep and harmful and will cut Ameri-
can demands more than expected and hence they come
up with a really scary scenario...that oil will average $45 a
barrel in the first half of next year and $55 in the second.
There are a million different ideas out there, one of
which might be correct!