Although prices may be volatile in the short term, a global imbalance of oil supply and demand will continue to drive prices higher in the long run, says Morningstar's Allen Good.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.
The price of oil futures exceeded $100 a barrel again [Wednesday]. I'm here with Allen Good, who is a senior equity analyst who covers energy, to talk about what's moving the oil price and what his long-term outlook is for the oil industry.
Allen, thanks for joining me.
Allen Good: Thank you.
Glaser: So, let's talk a little bit about the move today. ... We hear a lot of bad economic news out there about a deterioration of demand, yet oil prices seem to continue to rise. What's really driving that?
Good: Today what you are really seeing is more of a response to an asset sale that's occurred this morning, where ConocoPhillips sold their 50% stake in the Seaway Pipeline.
Now how this is going to affect oil is, basically you are going to see more volumes move out of the Cushing area in the Midcontinent of U.S. down to the Gulf Coast. So, really the movement today is more on the WTI price, and really it's just converging with the higher Brent price that we've seen over the past several months. So, really it's not necessarily a response to supply or demand, but more a logistical solution is what we are seeing today.
Glaser: So even though we are seeing this spike today that's more logistical, over the past few months since June, we have seen the price first fall and now slowly work its way back up. What's your longer-term view then on the supply and demand and where we think oil prices could be in the next one, two, three years?
Good: Certainly, we have seen a lot of volatility in the past coupe of months given the European debt crisis, concern over U.S. economic outlook, and whatnot. People are moving away from risk on a day-to-day basis, you can see oil move a lot.
Longer term, we think we are in a resource-constrained environment, where we are going to see structurally higher oil prices, given the amount of demand in the world versus the amount of supply in the world.
So, given that we are in that limited resource availability, we see higher oil prices over the long term. For our valuation purposes, we forecast $95 oil. That's where we think oil needs to be to keep marginal projects online and viable economically, to supply where current global demand is at.
Glaser: When we look at things like the delay of the Keystone Pipeline, does that have any impact on where we think oil supply looks long term, if it's more difficult to, say, develop the oil sands. Or do you think that they'll find other projects to bring that supply online?
Good: Keystone is really more of a story about supply for the U.S. and how that would affect Gulf Coast refiners. Really, whether Keystone goes forward or not, ultimately it will not affect what happens with oil sands. The world, like I said, we have less oil supply available than we did five or 10 years ago. That's going to make a call on the oil sands.
So those projects are going to get developed. The question on the Keystone is, does that oil come down to the U.S., or does it go West and go off to China. So, really those projects we think continue to be developed, regardless what happens with Keystone.
Glaser: So we think that oil prices are going to remain elevated, what does that mean for equities? Are there any that look attractive now in the space?
Good: Certainly, today you have seen a lot of movement. The refiners who were counting on that WTI/Brent spread are getting hit rather hard today. So this new pipeline reversal certainly hurts them. But it certainly helps those players in the Midcontinent who are producing oil out of, call it Oklahoma or the Bakken in North Dakota. A couple of those names that we like the best, that are on our best ideas list right now, that actually should ... respond favorably to this move today are someone like a Whiting Petroleum, who is a major producer in the Bakken, or SandRidge, who is a major producer in the Oklahoma area.
Glaser: Allen, I really appreciate you being with us today.
Good: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser.
