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Investors raising prices by betting on shortages { March 16 2005 } Original Source Link: (May no longer be active)
http://www.chron.com/cs/CDA/ssistory.mpl/business/3087442Traders are betting on shortages as the peak summer driving season begins in May.
http://www.chron.com/cs/CDA/ssistory.mpl/business/3087442
March 16, 2005, 12:13AM
New-world fundamentals hold sway in oil markets
By LOREN STEFFY
Copyright 2005 Houston Chronicle
The other night I was talking with a friend who reports on energy markets for a wire service. I don't envy him. Explaining real-time price fluctuations in commodities can be perplexing and often irrational.
When the markets open, prices may be up on concern that worldwide demand is rising. By noon, they may have fallen on worries that winter weather will be milder than forecast. And by the time the markets close, prices may have risen again, presumably because those demand concerns resurfaced.
Commodities markets, in other words, can be a little like the crazy aunt who sits in the corner at the family reunion: No one really understands what either is saying at any given moment.
Over the past two years, though, oil markets have been sending a clear message, reinforced during the past two months as prices have surged as high as $55 a barrel.
The gnawing concern about Hubbert's Peak, the theory that worldwide oil production may be in permanent decline, is colliding with increased demand from emerging markets such as China. The result is an oil market that defies convention.
Since December, crude prices have jumped as much as $15 a barrel, even as inventories of oil and gasoline have exceeded five-year averages. With more oil available, prices typically would fall in the short term.
The market, as Chronicle reporter Tom Fowler wrote Saturday, has adopted a longer-term focus. Fluctuating factors such as weather aren't having the effect they once did because they've been superseded by broader concerns about shrinking supply and rising demand.
Oil investors say they're seeing few signs that the ride will end, unless China decides to put economic development on hold. China used about 6.4 million barrels of oil a day last year, an increase of 900,000 barrels. The almost double the rate of increase for 2003. China isn't alone. India's daily consumption rose by 100,000 barrels last year, and analysts expect that number to keep rising, too.
You're seeing a similar push in gasoline prices, which analysts and the Energy Department predict will rise through the spring. Traders are betting on shortages as the peak summer driving season begins in May.
Normally, higher prices would curtail consumption, thereby pushing prices back down. Don't count on it. While we may not like it, we've become accustomed to $2-a-gallon gasoline, so the current prices probably won't crimp our driving habits.
Higher gasoline prices, coupled with a rise in crude and other commodities — copper, for example, is trading near a 16-year high — are sparking renewed inflation worries.
Energy sector on fire
At this week's OPEC meeting in Iran, Saudi Arabia pressed for raising production quotas, concerned that rising prices would put a damper on the global economy.
While it may heighten macroeconomic worries, the surge in crude prices isn't hurting the stock market. The price increases have ignited energy stocks, setting off a rally the likes of which hasn't been seen in two decades.
The five top-performing stocks in the Standard & Poor's 500 index this year are oil companies, including Houston-based EOG Resources. Shares of Valero Energy, a San Antonio refiner, lead the pack, rising almost 50 percent so far this year. Exxon Mobil's stock has risen 20 percent this year, and its market value — $391 billion — exceeds General Electric's, making it the world's biggest. The S&P's energy index has climbed more than 50 percent in the past two years, six times the gains of the broader market.
Beware of the bust
The rally in energy stocks is significant because the sector's shares are rising faster than the broader index. That hasn't happened since the 1970s, when an Arab oil embargo and turmoil in Iran roiled the markets.
Not everyone is getting to participate, though. Because energy companies are weighted less than other industries in the S&P, mutual funds that use the index as their benchmark haven't invested as much in oil companies, so the rally has had a muted impact on their returns.
And some analysts are worried that given the huge run-up in oil stocks, the time to join the rally may have passed. Here in Texas, we know all too well how abruptly the boom can end.
This time, though, something is different. The market dynamics driving the rally aren't as fickle as they've been in the past.
After all these years, the crazy aunt in the corner may be making more sense.
Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com.
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