A Tricky Time for Making Forecasts in the Oil Industry

Article excerpt

For the oil industry, it was the year of the unthinkable.

Who would have thought that crude oil would plunge below $11 a barrel? That Exxon would agree to acquire Mobil for $80 billion, reuniting the two biggest pieces of the Standard Oil Trust? That the crown prince of Saudi Arabia would court Western oil companies, seeking new investments in his country? That a new alliance between the Organization of Petroleum Exporting Countries and nonmember nations like Mexico would emerge to try to push through cuts in oil production?

Whether these developments will lead to more surprises depends, of course, on the price of oil. According to a survey of 31 analysts by First Call, the average price projection for 1999 is $15.05 a barrel, slightly above the average of about $14.40 in 1998. Ann-Louise Hittle, director of world oil at Cambridge Energy Associates, a consulting group, sees prices remaining under more pressure than Wall Street's consensus estimate. She has projected an average price of about $13 a barrel for light sweet crude oil for the coming year if OPEC decides at its meeting in March to keep production at the currently reduced levels. But if OPEC members cannot agree to keep these cutbacks in effect, she said, then the price could fall below $10 a barrel -- a further economic shock to the oil-producing countries. If OPEC and other producers decide, however, to cut production more, making even less oil available, then Hittle expects the average to go above $14 a barrel. With the oil market in turmoil, some analysts say forecasts about prices and the industry are difficult to make -- especially since many 1998 forecasts were far off the mark. "If next year is anything like this year, we should look for the opposite on every one of these issues," said John Hervey, an analyst for Donaldson, Lufkin & Jenrette in London. If that contrarian view is the case, here are some possibilities, seemingly as unthinkable as the events of 1998: Despite predictions, other big companies may wait before rushing into huge mergers like the Exxon-Mobil deal. The Saudis may open up more of their industry to investment than most top industry executives now expect. OPEC may be replaced by a stronger new group that includes major new producers like Mexico, Norway and Russia. And prices may recover faster than expected, and the industry may have to scramble to keep up with surging demand. Right now, most of the industry is still trying to survive in a world of sustained low prices and only modest growth in demand. The largest private oil company, Royal Dutch/Shell Group, said last month that it would sell 40 percent of its chemical business, cut some of its 105,000 employees and take charges of $4.5 billion in the fourth quarter. In addition, thousands of jobs will be cut by Texaco, Conoco, Shell and Chevron. British Petroleum and Amoco, whose merger was approved on Wednesday by the Federal Trade Commission, plan to shed 6,000 jobs. …


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