One On One With Bill O`Grady of AG Edwards
Tuesday, March 07, 2006
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SUSIE GHARIB: Oil prices tumbled today on speculation that OPEC ministers will not cut production quotas when they meet tomorrow in Vienna. In New York trading, crude prices for April delivery fell $0.83 to $61.58 a barrel. Joining us now with some analysis about the outlook for oil prices, Bill O`Grady, assistant director of market analysis at AG Edwards. Hi, Bill.
BILL O`GRADY, ASSISTANT DIRECTOR OF MARKET ANALYSIS, A. G. EDWARDS: Good to see you, Susie.
GHARIB: Good to see you, too. The talk among traders was at the OPEC meeting tomorrow, that they will not be cutting production. Is that what you`re expecting?
O`GRADY: That`s exactly what we`re looking for. A couple of reasons for it, one is oil prices have remained stubbornly above $60 a barrel and it looks in bad form for the cartel to be trying to boost prices when they`re already at elevated levels. Secondly, there is a lot of concern with the persistent outages that we`ve seen out of Nigeria that if they cut production and you have an additional geopolitical disruption out of Nigeria, that that could send prices up sharply higher, and they just simply want to avoid that.
GHARIB: There are some people who are saying that the markets right now are oversupplied. Is that the case?
O`GRADY: Well, that`s always a hard call. Let`s put it this way. Current inventory levels are running about 30 million barrels above their five-year average, but it would not unreasonable, given the geopolitical environment that we`re in, for consuming nations to want to hold more inventory and that`s exactly what they`ve done. The issue is is that we really don`t know what that magic level of inventory is, but we have seen it stabilize around that 30 million barrel level. If it rises above that, it could be a signal that we are a bit oversupplied. We are certainly amply supplied compared to where we`ve been, but the buildup in supply is probably desired as opposed to accidental.
GHARIB: What do you think is going to happen in the oil markets tomorrow, and assuming that OPEC does not cut production, will we see prices go lower?
O`GRADY: I kind of think not. I think we`ve probably kind of seen that action today, the market discounting the effect from OPEC. We are really watching very closely the negotiations between the International Atomic Energy Agency and Iran to see if some sort of deal can be cut there. If a deal is cut there, we could see additional price weakness. But at this point, last I saw of the news, we were still at an impasse and if that situation is not resolved, we could see further weakness, but I think the OPEC issue is baked into the market as we speak.
GHARIB: Given everything that you`re talking about -- the supply- demand outlook in the markets -- is $61, where oil is right now, the right price? Is that where oil is supposed to be?
O`GRADY: Well, it`s what the market says. I think it`s a little bit expensive. The work I do suggests the prices probably ought to be closer to $57. These prices are a bit elevated, given the level of inventory that we`ve had. But what we have seen since about 2003 is a persistent desire by consumers to hold more inventory and what we`re really doing is guessing that this is a level that if it gets above this, it suggests oversupply. But, honestly, the market is -- that relationship is not nearly as stable as it was a few years ago.
GHARIB: All right, Bill. Thanks so much for coming on the program.
O`GRADY: Thanks for having me.
GHARIB: We`ve been speaking to Bill O`Grady, assistant director of market analysis at AG Edwards.
