CBS Marketwatch 9/15/08

What King sees in the future is more energy price rises. He notes: “This time last year — September 2007 — a barrel of oil cost about $80, and rising … Today, a barrel of oil is trading for about $107, or about a 33% increase year over year. That’s no plunge … the recent price retreat is not a plunge. It’s just a correction within a long trend of rising prices for energy.”

King’s reasoning: supply is tightening. He writes: “Almost all of the world’s largest oil fields were discovered over 30 years ago and have been lifting crude oil for 30, 40 or more years. So crude oil output from many of the world’s oil fields is either flat (such as in Saudi Arabia) or falling (such as in Mexico). Even Russian oil output is dropping this year. No less an authority than the head of Gazprom recently stated that oil should sell for $250 or more per barrel.”

King also makes the interesting point that the world is getting more hostile to Western oil companies: “As recently as the late 1970s, Western oil companies controlled well over half of the world’s oil production. But now the NOC’s [state-owned national oil companies) such as Saudi Aramco, National Iranian Oil Co., Kuwait Oil Co., Petroleos de Venezuela, Petroleos Mexicanos (Pemex), etc. control over 85% of the world’s oil resources. Western majors control about 7% of the world’s oil resource base.”

King complains: “Yet in the face of all this, the market is currently selling off oil and other energy players. The market is selling off oil field service companies, infrastructure companies, precious metals companies and even basic metals.

“Would somebody please introduce Mr. Market to Dr. Depletion?”

My comment: Eventually the fundamentals will reassert themselves and all the panic and forced hedge fund selling will subside. There already are terrific bargains in offshore drilling and oilfield service stocks. I am watching this sector because record amounts of capital are being deployed offshore and will continue to be spent irregardless if Morgan Stanley or Goldman Sachs survives. These stocks have become cheap.

John Polomny
Co-Author:The Real Deal