Standard & Poor's integrated oil and gas equity analyst today provided perspective on the energy sector, including the disconnect between high oil and natural gas prices versus lagging energy stock prices as the threat of war in Iraq looms larger. Also discussed is the suitability of energy sector stocks as an investment opportunity.
"As an Iraqi war appears imminent, the market is anticipating a repeat of the 1991 Persian Gulf War, which was quick and led to a sharp drop in oil prices," says Tina Vital, integrated oil and gas equity analyst, Standard & Poor's.
"As a result, oil prices have fallen to under $30 per barrel from over $39 a few weeks ago. However, this time around, the energy landscape is different, with US crude and refined product inventories below their five-year range and natural gas inventories 48 percent below their five-year averages.”
“While some relief is on the way on reports of oil stockpiling and increased Saudi crude oil exports, very low US refined product inventory levels should continue to support higher oil prices," she added.
"Unlike the situation following the 1991 Persian Gulf war, when the market rebound in energy stocks appeared limited to large integrated oil companies, we expect related-energy businesses, like the drillers and oilfield services firms, to benefit this time around on a significant build of US refined product inventories, as well as a build-out of oilfields and infrastructure in foreign lands, such as Russia, post-conflict Iraq, and Venezuela," continues Vital.
"While the Iraqi conflict remains a wildcard in our forecasts, we expect the US resolution to the Iraqi conflict to be quick, with oil prices dropping off to the mid-$20 range, levels relatively high compared to historical averages of $18 to $20 per barrel."
These projections are in line with those of Global Insight, an independent economic forecasting firm, which projects WTI oil prices will decline upon resolution of the Iraqi conflict, averaging about $29 per barrel this year and under $25 in 2004, barring damage to oilfields outside of Iraq.
However, if a longer and more damaging war occurs, then Global Insight projects that oil prices could rise above $45 per barrel. In any case, price spikes are likely on market rumors and fears of supply disruptions.
Standard & Poor's Vital believes these high oil and natural gas prices should boost returns on energy stocks to the point where they attract buyers. Although energy stocks have lagged the prices of their underlying commodities, they have held up reasonably well compared to the S&P 1500 Super Composite Index over the last year.
The index's energy holdings were off 2.5 percent this year through Friday, and 11.4 percent last year, while the index dropped 5.6 percent and 22.5 percent during the same periods.
Crude oil prices, on the other hand, are at levels not seen since the Persian Gulf War of 1991. They began increasing over a year ago, when the Organization of the Petroleum Exporting Countries (OPEC) reduced production because of global economic weakness. Labor strife in Venezuela, potential military action in Iraq, Gulf of Mexico storms and a cold winter in the US, have pushed the price of a barrel of oil to near $40 in recent weeks.
Energy stocks and oil prices haven't moved in tandem, in part, because investors are skeptical that the high commodity prices can be sustained amid slowed economic growth over uncertainties about Iraq.
Vital recommends large, international oil companies, such as ExxonMobil, as safe haven stocks. "They tend to mitigate geopolitical risk as well as commodity price changes due to their diversification and their assets," continues Vital.
"Service firms likely to benefit from upstream producer spending include Nabors Industries, GlobalSantaFe and Weatherford International. Other prospects include independent exploration and production firms, such as Apache, Ocean Energy and EOG Resources, with above average production growth and a focus on tight North American natural gas markets.”
With 5,000 employees located in 19 countries, Standard & Poor's has the largest US equity coverage count among equity research firms that are not affiliated with a Wall Street investment bank, analyzing more than 1,200 US stocks. Standard & Poor's, a division of The McGraw-Hill Companies, provides financial data, analytical research and investment and credit opinions to the global capital markets. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
