Bullish crude-oil inventory data and the alluring prospect that
members will cut production more have oil-service stocks screaming. But chances are slim that the rally will last.
Philadelphia Stock Exchange's Oil Service
raced up 14% since Tuesday's close to a five-week high, it's still more than 50% off its 52-week high of 122.50, hit last May. Near 2 p.m. EST, the OSX traded at 54.04, up 2.85, or 5.6%, but down from an earlier high of 54.26.
For investors rushing to buy the beleaguered group, that's important to keep in mind. For just as quickly as the OSX surges 6 points following a strong move in oil prices, it can fall back to its current support level in the mid-40s, observers say.
In fact, many industry observers believe that without strong action from OPEC at or before its March 23 meeting, oil prices will tumble, taking the oil-service group down as well.
"If OPEC cuts,
oil-service stocks will go up, and if they don't, they'll go down," says Mike Nery, a vice president and analyst at hedge fund
Denver Energy Advisors
. "Why play that game?" He's not making any bets at this point.
Ditto for David Thompson, an energy analyst at Boston-based
Colonial Management Associates
. The market believes OPEC will cut, he says.
"I think the market is setting itself up for a disappointment, especially if the run-up continues," he says. Thompson, whose firm owns shares of some of the larger oil-service names as well as a few offshore drillers, says he is considering selling a bit into the strong buying wave.
Even if OPEC does cut, it would have to be substantial -- more than a million barrels a day -- to have a lasting impact on the market. Oil prices have rallied due to this week's inventory report from the
American Petroleum Institute
, which showed an unexpected decline in crude-oil inventories. The figures were backed up by Wednesday's inventory report from the
Department of Energy
. But discrepancies often show up in the weekly reports from the two agencies: The reports can vary by as much as 7 million barrels, which raises questions about how much importance to attach to them.
"This is the first week in a while where we've got a decline in inventories across the board," says Tim Evans, senior energy analyst at
Pegasus Econometric Group
in New York. "Inventory went down, and that's bullish.
But I'm not sure we can construct a trend and say the markets have turned a corner here and will continue to turn."
As far as OPEC's forthcoming meeting, some people are looking for a repeat of November's meeting when the group reaffirmed its commitment to comply with previous cuts, but gave no definitive guidance on extending them. That scenario "would be a disaster" coming out of this meeting, Evans says. Crude-oil demand typically drops by about 2 million barrels a day in the second quarter as it falls between the winter heating-oil season and summer's driving season, so no further cuts would exacerbate the oversupply, he says.
The most likely scenario in Evans' mind is that OPEC announces production cuts of about 1 million barrels a day. While that may initially give the market news to rally on, don't expect it to last, he says. "After a knee-jerk reaction to the upside, which might only last for a day, selling pressure will come back on the idea that it's something but still not enough," Evans says.
A sustained move in oil prices would have to break through the $13.75-per-barrel level, the recent high. Crude oil for April delivery traded at $13.30 per barrel Thursday, down a penny. Conversely, with no action from OPEC, the critical price on the downside is $11.35, hit in December. If prices break through that level, the next benchmark is $9.75 per barrel, hit in April 1986.
In fact, he adds, a rally in oil prices ahead of the meeting may actually serve to create a feeling of false security among OPEC members. "It's likely to reassure OPEC that things aren't so bad and make them less likely to cut substantially," he says.
Assuming no further cuts by OPEC,
estimates crude-oil prices will average $12.60 per barrel in 1999 -- far below the level where producers can recoup enough cash flow to begin drilling in earnest once again.