MSN Money Analyst: Hang on to your oil stocks
“Hang on to your oil stocks and buy more when the opportunity presents itself,” advised MSN Money investment writer Jim Jubak. While some analysts claim that the market is overpriced, Jubak argues that “a terrible coincidence of geology and geopolitics” could drive prices all the way to $180 a barrel in the next 24 months.
Jubak believes producers are not investing in oil projects at the rate necessary to stem rising prices. “Just when oil is getting more expensive to produce, the oil industries in three key countries — Mexico, Russia and Nigeria — find themselves short of cash. And without that cash, oil production in these countries, and global oil production in general, is headed into a decline,” he explains.
Jubak is not alone. In recent weeks several organizations have forecasted a further rise in prices, including OPEC President Chakib Khelil (he predicted $200 oil). William Ramsay, deputy executive director for the International Energy Agency, was asked recently if he believes oil prices are going to rise. “There’s not much to get in the way,” he responded, adding that “If there were greater (spare) capacity, it would reduce the anxiety, so if something happens in Nigeria, say , it would not make a difference to the oil market.”
Unfortunately, that is simply not the case. Despite a troubling economic slowdown in the U.S., demand is continuing to consume spare capacity. The IEA’s most recent Oil Market Report predicts 2008 demand will rise about 1.3 million barrels per day over last year. The report also gives another piece of troubling news: Recent production is not just stagnating. It’s falling. Whether that trend will continue remains to be seen. Russia recently announced a 1% decline in production for 1Q08. Russian production has risen steadily over the past decade, making any decline a “huge turnaround,” said Jubak. In Mexico, rapidly falling production rates have spurred a national debate over how to revive the nation’s oil industry. Decades of underinvestment and a constitutional ban on outside investment has left the nation’s lawmakers in quite a predicament. In Nigeria, corruption and violence have overwhelmed operations within the oil-rich Niger Delta.
There is hope, according to Jubak, that production will be rise significantly in the future. “It’s not as if the world’s oil industry isn’t finding new oil while production is declining in places such as Russia, Mexico and Nigeria. It’s just that the oil that is being discovered is either very expensive to produce . . . or a long time away from market. Or both, as in Brazil’s big recent oil discoveries.” Until then, Jubak is hanging on to his oil holdings.
Published Thursday, April 24th, 2008 at 5:08 pm and filed under Industry News.