The funny thing about oil is that when gasoline is $1.50 a gallon, not many people care that much about oil, oil prices, or oil companies. Get oil above 30 or 40 bucks a barrel, though, and suddenly people start paying a lot more attention.
Ever since Katrina walloped the oil-producing Gulf Coast, oil has been heavy on many folks' minds and getting lots of coverage on TV. We've even seen another new spate of glossy-covered financial magazines with sexy-sounding headlines talking about both $100-per-barrel oil and $30-per-barrel oil.
So what's actually going on? Well, the price of New York crude has actually dropped from a bit more than $70 a barrel to less than $63 per barrel in the past two weeks. Now, wait a minute -- a big chunk of U.S. production gets knocked offline, and oil prices go down? What gives?
Trying to explain all the whys and wherefores of oil price movements is a fool's errand -- and this Fool doesn't pretend to have all the answers. (I'm still waiting to get my crystal ball back from the shop.) But there are a few important points to consider.
First, high prices seem to finally be affecting demand. According to the American Petroleum Institute, deliveries dropped by 1.1% in August from the year-ago level. In contrast, crude oil stocks are up about 11% and year-to-date supplies to refineries are up 0.2%, depending on whose numbers you use. Last but by no means least, let's not forget that oil is a traded commodity. That means it is subject to the frenzied booms and panicked busts of any other traded financial instrument. In other words, I wouldn't be surprised if speculators bought up oil contracts ahead of Katrina and then sold them when the damage proved to be not quite as bad as originally feared.
Where do we go from here? With my crystal ball still in for its yearly tune-up, I can't forecast with any sort of certainty. But I can offer some general thoughts. First, with oil prices easing up, OPEC may pull back on its efforts to cool off the market with higher production. Second, while the Gulf production facilities weren't devastated, they were damaged, and I'm not sure that global producers can fully compensate beyond the short-term reserve releases we've already seen. Last but not least, you have a long-term problem of demand growing faster than supply. The developed and developing worlds are consuming more energy, driving producers to look deeper and further offshore for new supplies.
My gut feeling is that oil prices in the high $60s are too high, and that we might see a new equilibrium somewhere in the high $40s to high $50s. That's plenty high to keep profits rolling at ExxonMobil
For more energizing insights:
- In the Wake of Katrina: Drillers
- In the Wake of Katrina: Energy
- In the Wake of Katrina: Transporters
- In the Wake of Katrina: Refiners and Others
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).