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Falling Oil Prices Offer Great Stock Buying Opportunities: Byron King
Source: Zig Lambo of The Energy Report (7/3/12)
The "experts" had been talking about oil prices going to $130 per barrel. Now there's talk of $50-60 per barrel oil. Either end of that spectrum is not sustainable in the long run, says Byron King. In this exclusive interview with The Energy Report, he explains why he believes prices will settle in the $80-100 range. In the meantime, the recent pullback offers some interesting buying opportunities for investors ready to pounce when the market finds a bottom, as well as some names investors can nibble on right now.
The Energy Report: Things have been pretty hectic on the global economic and financial fronts lately and the energy markets seem to be defying the expectations and predictions of many analysts. What's your take on where we are and where things are headed?
Byron King: We're living with volatility, most of which is due to international currency and exchange rates. The dramatic decline in the euro has caused a capital flight to the U.S. and a strengthening of the dollar, which results in lower oil prices. The other big macro-type issues include the looming economic slowdown in China. More news stories are coming out about negative demand indicators in China, which will definitely be bad for Chinese consumption growth. The country may use less oil than people forecast. The Saudis are producing at least 1 million barrels per day (MMbbl/d) in excess of what they normally would. So, between the rising dollar, slowing growth and excess production in Saudi Arabia, we're seeing these gyrating low prices.
TER: One hundred and thirty dollar per barrel oil and $5 a gallon (gal) gasoline failed to materialize as predicted, and now there's talk of $60/bbl or even $50/bbl oil in the shorter term. Some oil analysts are now predicting $3/gal gasoline by early November. What's your expectation?
BK: Extremely high or low prices aren't realistic for the long haul. The world economy will hardly function with $130/bbl oil. The airline industry shuts down right away and much of the rest of the world will suffer accordingly. A $5/gal gasoline price makes for an instant U.S. recession. Whatever economic strength we saw in late winter and early spring got stuck in the mud when gasoline prices went over $4/gal on the East Coast and toward $5/gal in California. All of a sudden, the U.S. economy lost traction, and we're sliding back into recession.
And while the world economy can't deal with high oil prices, Credit Suisse's $50/bbl oil prediction, though it may happen, would not last long. For one thing, the seven sisters of oil exporting-Saudi, Iran, Nigeria, Kuwait, United Arab Emirates, Russia and Venezuela-simply cannot afford under $85/bbl oil because they have their own bills to pay. Those lowball prices could be reached because of events, but they won't remain because of supply-and-demand economics.
TER: Is the $80-90/bbl range reasonable?
BK: This morning, West Texas Intermediate (WTI) oil was trading in the $78/bbl range. That's rather low by recent standards. A WTI price of $80/bbl is enough to keep the North American oil industry working. A $90/bbl level for Brent, the international standard, will keep the international oil industry alive. It will tighten things up for the big oil exporting countries, but they'll be able to avoid bread lines and riots. The number that oil has to find is $80-85 in North America and between $90-100 internationally.
TER: Have upside speculators been chased out of this market at this point?
BK: This is still a trader's market, with rising prices and falling prices. For people with a really strong stomach and money to play the short term, have at it, boys. This is your market. The last thing the traders want is for oil to stay static at $85/bbl, though the rest of the world might like that for budgeting and projecting purposes. For traders, the last couple of months have been terrific. The people who understand the market and are successful over the long term know that you sell on the way up and buy on the way down. It's a question of understanding the market dynamics. As Mark Twain said, "If you're going to throw your eggs in one basket, you have to watch that basket." When you're trading at the margins and a move one way or the other could wipe out your capital, you have to keep your eye on things. But the big oil thinkers don't worry about today's headlines. They need to think about the very long term.
TER: Big companies are usually able to absorb oil price fluctuations, but what happens with the smaller companies during periods of low prices and volatility?
BK: It's been a tough world out there for small companies without deep pockets. The energy business, in general, is for companies with money. A small gold miner versus a small oil company carries a difference of at least one or two orders of magnitude. The equivalent of a $20 million ($20M) gold company would be a $200M oil company. With the small guys, the big concerns right now are geographic and economic.
If you're in the natural gas business in North America, you have to be deeply concerned. Natural gas prices are at historical lows and the cash flow just isn't there to support much development. A small company may have tens or hundreds of millions of dollars tied up in leases. If you don't somehow drill or exploit these leases in one way or another, you're going to lose them. So not only would you not be drilling or extracting, but you'd lose your leases, too. That's a terrible predicament.
So what will we see in North America? There will be some cutbacks in drilling. It's already happening, but we're going to see more of it. It will affect the smaller drillers and service companies first. The big guys-Halliburton (HAL:NYSE), Schlumberger Ltd. (SLB:NYSE) and Baker Hughes Inc. (BHI:NYSE)-will also feel it but, they have much deeper pockets and they're large and international. So we'll see some rigs get stacked, but I don't think we'll see as many as some of the gloom-and-doomers are forecasting. A lot of these smaller companies have to keep their geologists and engineers working and drilling or all of that money that they spent on leases in the last five to ten years goes down the drain.
Overseas is another story. You almost have to take each country as you find it. Argentina is a disaster with what's going on with Repsol YPF SA (REP:BMAD). A couple of weeks ago, a company called Pan American Energy LLC saw its operations literally overrun by rioting workers-one of the largest and oldest fields in Argentina was almost shut down because of political issues and labor unrest.
Look at Poland. A lot of people were thinking Poland was going to have its own shale gas revolution, but a couple of weeks ago, Exxon Mobil Corp. (XOM:NYSE) decided to pull out of Poland after a couple of bad wells. Now, the cynics are saying that Exxon is getting better deals from Russia. Russia is the big fish that Exxon wants to land, so it's going to walk away from Poland.