OIL SUPPLY AND DEMAND
Oil futures hit the all-time high of $50 a barrel on the New York Mercantile Exchange this week. But some of the biggest investment houses -- including Merrill Lynch and Morgan Stanley -- have been sticking to the view that oil will return to the $30 to $40 a barrel level by next year.
There's little doubt that a decline in oil prices would be good news for stock market investors. Oil is a great nemesis for Wall Street -- the 1970s oil shocks were one of Wall Street's bleakest periods ever. Back then, it hurt economic growth and boosted inflation, and that's what Wall Street is worrying about right now.
STOCKS PULL BACK
Rallies in oil have led to quick pullbacks in stocks. But with energy prices up by 50 percent this year, Wall Street's relatively low single-digit percentage declines in most key stock indexes may not have kept up with the upheaval in the oil patch.
"The Wall Street analysts have been a little slow in revising up their estimates" of oil prices, said John Derrick, director of research at U.S. Global Investors Inc. "For a long time they've had the belief that prices will come back down. But at some point they're going to have to adjust that view."
For much of this year, oil giant Exxon Mobil Corp. (XOM.N: Quote, Profile, Research) has been the most-shorted stock among the 30 Dow Jones industrials, meaning investors are betting that its price will drop. But for the year to date, Exxon has defied skeptics and its 17 percent gain is second only to Boeing Co. (BA.N: Quote, Profile, Research) , which has been helped by military spending during Iraq war.
Soon there will be a fresh reality check for the stock market bulls who have been forecasting an oil pullback. The impact of costly oil will start to show up more in the upcoming company earnings reports, said Peter Boockvar, equity strategist for Miller Tabak & Co.
DIFFICULT EARNINGS PERIOD
"This will be one of the most difficult earnings periods we've faced in a while," said Boockvar.
In addition to oil, there will be rising costs for other commodities, Boockvar said. A spate of companies ranging from Coca-Cola Co. (KO.N: Quote, Profile, Research) to Colgate-Palmolive Co. (CL.N: Quote, Profile, Research) have already warned that they've had trouble getting consumers to pay more for their goods. And that's putting a crimp in earnings.
"If you have a limited income, and you're paying the cost of oil at $50 or more, you might decide you don't need that extra 12-pack of Coke," said Cooley.
A rise in prices at the pumps has been a key factor in the economy's soft patch, analysts agreed. Indeed, said Peter Cardillo, chief market strategist for SW Bach and Co, the economy's recent weakness has led the market to place too much importance on oil. But now, he says, amid signs that the economy is pulling out of its slowdown, investors might pull back from their day-to-day watch on the action in the oil futures pits.
The economy "can adjust to $50 oil" he argued, but it's the fear that it will go to $60 or more that's kept Wall Street on edge.
"The market wants to go higher, and it wants to start concentrating on the possibility of a stronger economy next year," Cardillo said. "Unfortunately, we have to wait and see where oil prices settle."
LONDON: The world's oil refiners are unimpressed by Saudi Arabia's boost to production capacity that would only swell supplies of sour, high sulphur crude while they hanker for sweet oil.
US oil prices still hovered near $50 yesterday, testimony to the indifference to Riyadh's pledge to hoist official production capacity by 500,000 barrels per day (bpd) to 11 million bpd.
"Most refiners couldn't take more sour if they tried," said one refiner, who asked not to be named.
"We have a glut of sour crude and a short supply squeeze on low sulphur crude oil and products, so extra Saudi makes no difference whatsoever," a physical oil trader said.
Riyadh's new increment, together with capacity expansions in Kuwait and Iran will add some 900,000 bpd of new sour crude capacity by year's end.
But the kingdom has made clear it will only tap its extra reserves if warranted by customer demand. Saudi Aramco's marketing plan for this month and next calls for production of 9.5m bpd.
New Saudi output would come courtesy of intensified drilling in the kingdom's oilfields, primarily new expansion projects at Abu Safah and Qatif, and yield mostly Arab Light - similar in density to North Sea Brent crude.
But analysts said it is still relatively high in sulphur and more difficult to refine into the low-sulphur products increasingly in demand for transport fuel.
"The impact on the market will be pretty negligible," said Seth Kleinman, analyst at PFC Energy in Washington. "The world is awash with sour because there is a dearth of desulphurisation capacity."
The surplus of heavy sour crude, which has lower yields of lighter products, but is rich in heavy products like fuel oil, has sent sour grades diving to record low differentials against light sweet marker grades that have hit record highs.
Saudi Arabia's latest official selling prices for sales of its Arabian Heavy crude into the US have been set at $11.30 below US light sweet benchmark West Texas Intermediate, a fall of $3.35 compared with the level for May.
Desulphurisation capacity is being increased, but so is demand for low sulphur products as specifications are changed across the globe to introduce cleaner burning fuels.
The new oil from Saudi Arabia's Qatif field will be blended into Arab Light, while that from Abu Safah is Arab Medium.
Crude quality is based on density, measured by American Petroleum Institute gravity standards and the amount of sulphur it contains.
Arab Medium and Arab Light streams have respective APIs of 29-32 degrees and 32-36 degrees but relatively high sulphur contents of about 2.5 per cent and 1.5pc, respectively.
They would not make up for any major outage from Nigeria where unrest in the oil-rich Delta region is threatening to shut production of light sweet high quality crude.
Still light Saudi oil offers more hope than heavy sours of alleviating current high oil prices, which for light sweet benchmark Brent crude and US futures have hit record highs.
"(Qatif) offers the highest near-term hope of narrowing light-heavy differentials," Deborah White, senior economist at SG Commodities, said in a research note.
