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| THE CASE FOR OIL |
| | December 20th, 1999 | | Issue No. 20 | | | | | | Long term fundamentals for both oil and gas are very positive, primarily a supply story. A global economic recovery, and other factors, have all-but eliminated the world supply glut that existed at the beginning of the year. Oil inventories are depleted, setting the stage for a spike in any sudden increase in spot demand. More important (than OPEC production cuts) is the decline in exploration and development in the last year, evidenced by the inability of the market to generate new supplies in response to the higher spot prices. U.S. production is at its lowest level in 50 years. Activity outside North America has declined too; rig activity has dropped by one-third in the last year. Further out, the picture continues to be positive for higher prices, with steady increases in demand against flat or even declining production, even with increases in exploration. Following a strong summer, inventories of gas have built up and the price fallen, down 28% in the last month to $2.20/mcf. Again, it’s a supply story, and supply growth is non-existent, despite higher exploration. The market does not believe the present higher oil price ($27) is sustainable, and the oil and gas stocks are trading as though prices were much lower, at the lowest valuations for five years. |
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