PARIS () -- The venerable and entertaining Matthew Simmons of Simmons International investment banking has managed to tweak the ear of the media once again this week. This time however it is not those nasty Saudi Arabians about which Simmons has written so much. Instead it is about pipelines.
Apparently because BP [NYSE:BP; LSE:BP] has had serious corrosion at its Prudhoe Bay North Slope Alaska operations we are heading for $300 crude. Not surprisingly he did not specify a time frame for that.
"The industry cut too many corners when prices were low. For 25 years, there was not a proper maintenance program. We backed ourselves into a system, rigs, pipelines and refineries, that rusted away. The anecdotal evidence is so widespread that it is undeniable. Until we had something as stunning as Prudhoe Bay, the industry was able to say that incidents were one-offs or that these allegations came from disgruntled employees," he said.
From this point Simmons concluded that the price of a barrel of crude will hit $300 due to it being "Pearl Harbor day" for the energy industry.
On the other hand we have the serious bear team out there. Whispers are circulating that the flood of speculative money, that people keep talking about, is about to turn into a drip. Then when the speculators exit the market, oil is going to crash back down through all its previous support levels to as low as $10.
They are both wrong. As wrong as Britney Spears' nude photo. As wrong as the invasion of Iraq. As wrong as Posh Spice's diet.
On the pipeline side the service sector - the people who lay the Goddamn things - cannot keep pace with the amount of money it is grubbing up. Companies like Schlumberger and Halliburton have astounded even the most careful of analysts with their never ending profitability. The only problem the service companies have is being able to complete all the orders they have as iron and steel and personnel costs escalate.
There are certainly problems with maintenance but it is hardly a surprise. The arrogant and often disgusting behaviour of the oil majors in the Niger Delta, shows that where they can they are quite happy to leave pipes to decay to nothing. Prudhoe Bay is nothing compared to that.
On the downside the amount of speculative monies in the crude oil market is significant, but not that much. Oil markets do not trade on single contracts, some 'wet' - real oil for delivery to people who want it - and some 'paper' - speculation. They tend to trade on spreads, basically people hedge to pieces.
Speculative money on the oil market sits around $110 billion. As an example that is roughly around a quarter of the current market cap of Exxon Mobil. Almost exactly the cumulative value of no less than Schlumberger [NYSE:SLB] and Halliburton [NYSE:HAL]. Not really that much. Take away one quarter of Exxon [NYSE:XOM] and you still have a lot of corporate value right?
Take away Schlumberger and Halliburton and you still have Baker Hughes [NYSE:BHI], Technip [NYSE:TKP], Transocean [NYSE:RIG], Saipem [OTCPK:SAPMF], Nabors [NYSE:NBR] and the rest of them. If all that money left the oil market it would shake out to the downside, of course. But it is not going to in one fell swoop.
The oil market is going to rest on the same fundamentals we plough over on this column week after week. It sounds cool to talk about price crashes or "Pearl Harbor" days but it is not the reality of the situation.
As Crude sits at around $71 there is plenty of upside left. We only need a hurricane, a belligerent statement from Iran and renewed attacks - as seem so likely - in Nigeria and $80 is here. The only real way we could ever get to $10 oil again is through a recession so great you won't have the electricity to power your kettle let alone a computer. But then the newspapers do not like to report that. Not quite as sexy is it?