Oil – A Vacation From U.S. $100/barrel… For Now

(Carter Group — ScotiaMcLeod)

With Europe, Asia and Japan assumed to be in a synchronized recession for the first time in 60 years, the forecasts for demand of crude oil are literally changing by the minute. These revisions though are entirely focussed on the next year and not the next decade. The myopic view of traders and speculators being what it is, the entire global energy market is being deeply discounted. Wholesale gasoline prices in New York have collapsed by 60% from early September’s record setting prices. Crude oil is less than half of what it was in July and energy stocks as a group have roughly taken the same kind of dramatic haircut.

Given the precipitous drop in prices and the ongoing challenges facing corporate borrowers, we can’t help but wonder how many of the expansion and exploration projects currently in the works will soon be shelved as oil companies adopt a more cautious approach to planned expenditures. These days the markets are swiftly punishing large corporations that follow-thru with takeovers or expensive projects on the books (witness the flogging of Teck Cominco’s shares recently). The expected return on any big oil company’s infrastructure investment looks remarkably different with $60/barrel oil rather than $100/barrel oil. Using Steven Forbes $35/barrel estimate, most infrastructure investments would seem guaranteed money-losers.

Although you wouldn’t know it by looking at this week’s market prices for crude oil, the global energy supply crunch has not gone away. This is an important factor for any investor willing to look beyond the next 12 months. The International Energy Agency was doing its best to deliver a wake-up call during this week’s World Energy Outlook from London, but it doesn’t seem to be finding much luck with getting policy makers to listen (or care).