Oil price spike catches market off guard

By Robert Guy

The crisis in the Middle East and the early arrival of cold weather in the United States have seen crude oil prices spike up sharply.

In Asian trading yesterday November futures (the spot month) for crude were trading at $US32.27 a barrel - US41" higher than Monday's close in New York. Monday's close itself was more than a dollar higher than at the end of last week.

The increase has caught many in the market by surprise. Last week's release of 30 million barrels from the US Strategic Petroleum Reserve sent prices reeling lower.

Most of that oil is destined for the US heating oil market, where supplies are at least 35 per cent down on a year ago, owing to problems at refineries.

US traders now appear worried by developments in the Middle East, although the Israeli-Palestinian confrontation is so far confined to a limited area.

"The reaction is overdone," said Chicago oil analyst Mr Phil Flynn, "but even a faint fear of conflict in the Middle East with this supply situation will send prices up."

The cold snap across the US north-east added to the supply problems by pushing up demand before distributors had time to put oil from the reserve into the system.

Although this will be smoothed over in coming days, the market is worried about the supply prospects for heating oil, with forecasters projecting a 12 per cent increase in US domestic demand this year compared to last year.

Although the crude oil price is 15 per cent down from last month's 10- year high of $US37.80, prices have risen 26 per cent this year. That surge in crude prices has underpinned a rally in Australian energy companies, with the S&P/ASX Energy Index climbing 16.3 per cent this year.

While this has boosted cash flow and profitability, Australian energy companies have not been able to gain the full benefits of rising prices and the falling $A because of adverse currency hedging programs.

Adelaide-based Santos has been one of the sector's star performers, surging 60 per cent since early May. Strength in crude oil and gas prices underpinned a 147 per cent increase in interim profit to $207 million, although there is speculation about the disposal of its 36.4 per cent stake in QCT Resources.

Santos's stock price also clearly has a takeover premium priced into it, with the South Australian Government reviewing the maximum 15 per cent shareholding cap and an announcement expected by the end of November.

The company is close to announcing a replacement for recently departed managing director Mr Ross Adler, and analysts believe the new appointee could add further value.

Woodside Petroleum, the largest company in the energy sector, has also outperformed the market, racing up 21 per cent this year.

Broker Ord Minnett believes that there may be further upside for the oil sector, but has advised that it could provide a selling opportunity.

The Energy sector is trading on a normalised price-earnings multiple of 14 times forecast 2001 earnings, compared to just under 13 times for the All Resources sector and 16 times for the total market.

http://www.afr.com.au/update/index.html

-- Martin Thompson (mthom1927@aol.com), October 10, 2000