From: vince farrell
Sent: Thursday, February 28, 2008 11:11 PM
Every now and then you have to get lucky. I recommended EOG Resources several times the last few weeks and on Thursday they had an analyst meeting that blew the doors off. The stock ended up almost $20 to $125 on a very strong production outlook detailed at the analyst meeting. We sold a few shares into the strength since the position became a disproportionate weight in our portfolios. It is still one of our larger positions.
Nice as the gain was, it leads into a bigger discussion of "whither goest the price of oil." (EOG is primarily a natural gas producer, but you get the idea.) Very near term the price of oil is being greatly influenced by Turkey's incursion into Iraq, Iran's nuclear program, Exxon vs. Chavez, violence in Nigeria and the consequent geopolitical instability and nervousness.All of these factors can reverse themselves- but I bet they don't- and oil prices could calm down. Looking beyond the immediate, I see nothing that would tell me oil won't stay high in price and over the longer haul, move even higher.
Supply and demand is in precarious balance.OPEC's spare capacity is limited and non-OPEC supply has continually disappointed.
Oil is priced in dollars and OPEC's income versus the other currencies they want and use is no where near what the dollar price says it is. Saudi oil fields are declining at a faster pace than they will admit. The Saudi's have never had as many rigs drilling with apparently little in the way of incremental production being brought on stream. People who figure such things say the Saudi budget would be balanced if oil were about $65 a barrel. Eighty percent of the population is under the age of 21. There is huge social network that the Saudis don't dare let fray for fear of stirring even more issues with Islamic fundamentalism. Lip service notwithstanding, the Saudis want ever higher prices.
75% percent of the world's oil production is from fields discovered more than 25 years ago. Despite intensive drilling programs, the new fields are significantly smaller than the older discoveries. In other words, the easy stuff has been found. 77% of the known oil reserves are controlled by State Oil companies that, generally speaking, don't like us very much. They have no incentive to do anything but maximize the price.
Demand continues to rise at an inexorable pace. The emerging nations let by the Brics - Brazil, India, Russia and China - are now 30% of world GDP
(the US is 28%). Despite the US housing crisis and the consequent credit crunch, these nations are still growing 5% a year. China, for example, has four times the number of people than the US but only 1/6 the number of cars. Internal growth and the desire for life's comforts, not to say status symbols, will continue to drive demand for oil. The US uses about 25 barrels of oil per person per year. China less than 2 barrels per person. That number will soar as Chinas mddle class develops.
In 2005, the world consumed 31 billion barrels of oil, but the industry discovered only 12 billion. The inability to replace production has been an unfortunate constant the past few years.
My best guess is that the price of oil will back off a bit as growth in the US is, at best, sluggish. Oil averaged $72 a barrel in 2007. If I had to put a number on it, I think oil will average above $85 a barrel in 2008. I do expect seasonal softness as we exit the winter heating season, but for the factors mentioned above, I don't think it will be too many years until we look back fondly at "only $100 per barrel oil."
I'll be leaving Saturday for the UBS Energy Conference. While everything said there is off the record, I will be able to report on the sense of the meetings. There will be over 80 CEOs of energy companies present, and I'm really interested to hear what they have to say.
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