Oil analysts contend that last week's terrorist attacks on the US will keep world oil markets unstable in the short term, although supplies are adequate for now.
The threat of either US sanctions or retaliation against any country that might have aided the Sept. 11 terrorist attacks in New York City and Washington, DC, is certain to stimulate concerns about Middle East oil supplies that could drive up market prices, said Michael C. Lynch, chief energy economist at DRI-WEFA Inc.
"You got to figure for a couple days things are going to be a little crazy before things settle down. It looks like the Organization of Petroleum Export- ing Countries has done a good job of stepping in and calming markets, which should help the crude price," he said.
"I've been seeing all these reports of gas stations jacking up the price, but I think that's like a 24-hr phenomenon. They will realize there is not really a problem with gasoline supply, and price will come right back down.
"On the other hand," he said, "there is a question whether the oil industry will become nervous and increase inventories. That is the sort of thing you saw in 1979, for example, after the Iranian revolution was over. People were still nervous, and they kept buying oil and filling up their tanks, and that kept demand high for awhile."
Lynch acknowledged, "You might see something like that for the next few months. As long as there is political uncertainty, there is always going to be concern that something may happen that might affect the supply of oil, and it might be a better idea to keep your inventories 5%, 10%, or 15% higher."
Such hoarding could keep pressure on the oil markets, in a situation where OPEC would be less willing to increase production, Lynch said.
"Some, like the Saudis, may get nervous and say, 'Look, you don't really need the oil to meet consumption. You are just putting it into storage, and we don't want that, so we are going to trim supply a little,'" he said.
If that situation were to develop, Lynch said, prices for US benchmark oil futures could exceed $30/bbl to the end of the year.
Reduced air traffic
Meanwhile, the suspension of all civilian air traffic has reduced US demand for oil by 1.8 million b/d, or almost 10% of its total, said Adam E. Sieminski, global energy strategist for Deutsche Banc Alex. Brown. But that won't last long, of course.
"Longer term, demand concerns hinge on an exacerbation of the current global economic slowdown driven by a loss of consumer confidence. Every 1% loss in expected global GDP growth takes about 400,000 b/d away from expected oil demand growth," he said. "Prior to the attacks, our economics team downgraded its US GDP growth forecast from 1.7% to 1.2% for 2001 and from 2.6% to 1.6% for 2002. While we don't think this would have a major impact on 2001 demand growth, with basically only the fourth quarter remaining, we estimate that a 1 percentage point drop in 2002 GDP growth could mean 100,000 b/d, or 50%, less [oil demand] growth than our current expectation of 200,000 b/d in 2002," said Sieminski.
Last week's terrorist attacks will likely increase US desire for energy independence, "particularly for supply," Sieminski said. This could mean more political support for a gas pipeline from Alaska and increased drilling on restricted land in the western US, the Gulf of Mexico, and perhaps even the Arctic National Wildlife Refuge coastal plain in Alaska, he said.
"We believe the attacks could lend momentum to a move toward increased automobile fuel economy and other measures designed to promote conservation and efficiency," said Sieminski.
Unpredictable markets
There is no way to predict which way the oil market will go in the immediate aftermath of the disaster, said Matthew Simmons, CEO, Simmons & Co. International, Houston.
"Anytime you get an unexpected event in the wacky energy markets, the 100% speculation on the [New York Mercantile Exchange] means it could go way up or way down," he said. "It's just one more element of volatility to the far too volatile energy market."
The problem is that too many people look at the market reaction on NYMEX and then worry later about the real fundamentals of the market, Simmons contends.
But one short-term fundamental concern is the consumer reaction to the Sept. 11 attacks. If consumers get "scared" by the event, that could push the country into a recession similar to what happened in 1990 during the impending Persian Gulf war, Simmons said. At that time, people were concerned about a long protracted war such as that in Viet Nam, he recalled, adding that it was enough to sink the country into recession. If consumers react negatively, it could be enough to cause a recession and have an obvious negative impact on the demand for oil, he said.
However, on the supply side, another fundamental worry centers on posible retaliation by the US against the perpetrators of theh attacks..
If it turns out to be Iraq, it will be difficult to make up for its 2.5 million b/d of supply, he said.
"It's a pipe dream that we can replace that," Simmons said. "We have never been more exposed than we are today."
Simmons said that motor gasoline stocks are almost at an all-time low, and heating oil inventories are at an historical low, even though heating oil inventories currently are greater than they were this time last year. "We drained European stocks to make sure we had inventories here," he said.
The Houston analyst also expressed concern about lagging growth in non-OPEC oil output despite strong oil prices in 2000-01.
Non-OPEC production stood at 43.2 million b/d in 1998 but, by third quarter 2001, it averaged only 44.4 million b/d. And 1.3 million b/d of that increase was attributed to Russia.
"Non-OPEC production outside of Russia was down 100,000 b/d after 3 years of the highest prices in decades," he said. "This is the first time of 2 full years of an unbelievable price explosion. We had no supply response."
Simmons says the nation has no "cushion" of energy supplies should the US have to do something that "threatens the supply of oil."
"We should never have let our cushion go away," he said.
Demand dropoff
A different viewpoint, from John S. Herold, suggests the tragic events will be an overall negative on oil prices, because the analyst doesn't see any supply side disruption. Demand will falter following an initial but short-lived "rally" of prices, Aliza Fan, vice-president, John S. Herold of Houston, said last week.
"When the market opens in the coming days, there will be a significant rally in the crude oil commodity backed by concern for supplies and possibly a war, especially if it involves a Middle Eastern country," said Fan.
But, looking at the longer-term ramifications and fundamental impact on crude oil, there will be a slowdown in the global economy that will greatly affect prices, she said.
"This won't be positive for prices," Fan said.
The uncertainty on the demand side, especially on a global basis, will be a negative.
For the time being, however, "OPEC will step in to alleviate pressures on supply," she said.
