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April 11, 2003, 7:15 a.m. Ten Biggest Misperceptions About Oil The conventional wisdom is all wrong.

n the past few months, I have read many comments about how current events might affect the oil industry and oil stocks. I have, in large part, been in disagreement with the conventional wisdom that says the war will send oil prices racing upward, oil prices won't fall much post-war, world oil supply is troublesome, and oil stocks are a bargain.

So, in an effort to set the record straight, I have compiled the ten biggest misperceptions about oil, setting each against the hard facts (in italics).

1. “Venezuelan oil production can’t come back.”
Venezuelan oil production rose from 300 thousand barrels a day to 2.7 million barrels a day in the last three months.

2. “OPEC is producing at capacity.”
OPEC production has blown through capacity estimates.

3. “The war will send oil prices to $50.”
Oil fell 34% to $26.40 a barrel when the war began — just like 1991 (the first Gulf War).

4. “Low inventories mean oil prices will stay high.”
Inventories have no predictive power; they tell you only where oil prices are at that moment.

5. “Things are different from 1991.”
Oil prices, oil stocks, and the S&P 500 have mirrored ’91 performance.

6. “Oil stocks are a buy; they reflect $23 a barrel.”
Typically, oil stocks underperform as long as oil falls.

7. “Chinese demand growth will lead to higher oil prices.”
Prices are determined by supply and demand — China is one small part of the equation.

8. “Earnings will be strong this quarter. Buy oil stocks.”
The market only pays for sustainable earnings growth.

9. “Oil prices will fall, but only to $25 a barrel.”
Volatility, history, economics, and supply/demand don’t support this.

10. “The common view is that once the war is over, oil will fall to $20 a barrel — but it won’t."
Actually, nearly everybody thinks oil won’t fall below $25.

As I've written here before, when it comes to oil there are significant parallels to the situation in 1991. There's no reason to think that scenario has changed.

— Mr. Leuffer, CFA, is senior managing director and senior energy analyst for Bear Stearns & Co. Inc.

The Latest from Frederick P. Leuffer: Inside OPEC’s Surprise Cut  9/29 Oil-Price Wild Cards  7/30 Ten Biggest Misperceptions About Oil  4/11 Full Leuffer Archive A Bear Necessity Let Bear Stearns help you reach your financial objectives. Visit Bear Stearns Online

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