Oil Industry's Road to Recovery Keeps Getting Longer

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Back in January, word was that oil prices would come back in March, with Wall Street pros telling investors to wait until spring.

But spring's come -- and is nearly gone -- and no recovery is in sight. Now market experts anticipate the recovery will coincide with the summer driving season, with demand for gasoline helping to drive crude demand -- and prices -- higher. But the great cruisers in America have already started burning up the pavement, and gas at the pump remains cheap.

Industry soothsayers have given up on spring and, for the most part, summer. Analysts who have held on to hope too long are scrambling to reduce their earnings estimates for the second quarter and 1998 and 1999, as well as their price estimates for industry crude oil.

All in all, it's a confusing and painful time to be in love with the oil industry. Demand in economically strapped Asia has slipped at a time when the market was already gurgling under the weight of heavy supply. Moreover, the

OPEC

nations have shown the usual lack of discipline, and the cartel simply keeps pumping out more oil, keeping prices low.

Underscoring the pain and confusion,

PaineWebber's

Frank Knuettel recently increased his ratings on six major oil companies to attractive from neutral, indicating that he believes the oil supply/demand picture will come into balance by the end of the year. Meantime, the energy research group at

Deutsche Morgan Grenfell

cut its oil price forecast to $15 for 1998 from $16, and to $16 for 1999 from $17, based on the belief that the Wall Street's 1998 average estimate for a barrel of oil -- $16.50 -- is too optimistic. Taking the bull by its horns, Wes Maat, DMG's oil service analyst, chopped his earnings estimates for 17 oil service companies by an average of 9% to 11%.

Many other analysts who cover oil services -- the $165 billion industry that provides oil rigs, boats, technology and drilling bits to big and small oil companies -- are still basing their 1998 and 1999 earnings estimates for this group on $17, even $18, oil.

Given the mostly optimistic pricing estimates and the persistent oversupply problem (one crude oil analyst and trader estimates a surplus of 800,000 barrels a day through the third quarter), it's growing more likely that earnings estimates for the oil group are going to get revised lower as the weeks roll ahead.

In fact, the estimate reduction game is already underway in some spots. Take

Tidewater

(TDW) - Get Report

, for example. The 1999 consensus estimates for this marine service boat supplier have changed 33 times so far this year. On January 2, Tidewater was expected to earn $5.10 in 1999. As of June 11, when the last change went into

First Call's

system, the average estimate for 1999 stood at $4.23, an earnings growth rate of 3% over fiscal 1998. That single-digit gain follows earnings growth of 73%, 68% and 62% in the last three fiscal years, respectively.

Away from the chatter of optimistic Wall Street types, oil traders keep pushing prices lower. Oil futures for July delivery traded at near-historic lows Monday and were down over a dollar before coming back just a tad, to $11.66 per barrel, down 93 cents, at 1:30 p.m. EDT. Prices averaged $14.90 in May and $15.28 in April. In order for oil to recover to an average price of $17 for this year, prices would have to leap above $17 and stay there for quite some time.

As Mark Zinn, a trader at

Charter Capital

in Ft. Lauderdale, points out, "Nothing makes a 10-year low without having to hang out in that area for a while." He says a 50% price reversal is a lot to ask, and he doesn't think we'll get it.

But Zinn is a trader -- one who has made a lot of money shorting the oil service sector lately. To him, long term is about three days.

It's the mutual funds invested in the sector that are feeling much of the pain from falling prices. But they are also the ones who can take a truly longer-term view of oil prices and the fundamentals of the industry.

Mickey Brivic, an equity analyst with

USAA Investment Management

who follows the energy sector, is bolstered by analysts' cuts in ratings and estimates, since that is a good indication the stocks at getting "close to the bottom." His perspective of long term -- which jives with what financial advisors tell new investors -- is more along the lines of three to five years. Still, his funds have lightened up on the group, he says, and are making "single bets on individual names in niche segments of the group, such as construction and engineering, or subsea construction."

Others wait for that magic date -- June 24 -- when OPEC oil ministers are expected to announce definitively they will cut at least an additional 500,000 barrels per day from their production, thereby bolstering world crude prices (and their own sagging economies, which depend heavily on oil revenues).

But wait, isn't that what the

Riyadh Pact

was all about? To take 1.5 million barrels per day off the market beginning in April? So why are analysts now saying we need another million barrels lopped off production? Is it possible OPEC did not keep their word?

Trouble was, the cuts actually enacted did not meet the levels originally announced in the pact. Iraq's oil-for-food program has offset some of OPEC's reduced output, and actual production numbers for April and May vary according to the survey used. In fact, one survey said OPEC actually ramped up its May production over April's. As so many crude oil traders predicted months ago, the market has enacted its own form of revenge.

And the going won't get any easier. This summer alone, the market will continue to deal with the Asian economic crisis, optimistic projections for demand and possible weather-related problems from

El Nino's

sister,

La Nina

.