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Energy


Industry Outlook -- MANUFACTURING

ENERGY

This year, the energy business faces its biggest test in over a decade. Economic turmoil in oil-hungry Asia, rising crude supplies, lower prices, and the forecast of a warm winter in the Northern Hemisphere are likely to challenge the industry's recent good fortunes.

Most industry watchers expect world demand for oil to slow from the torrid rates of recent years. The biggest reason is the Far East's woes. With demand growing in the U.S. and Western Europe running at only 1.6% a year this decade, superhot Asian economies were the industry's engine. Now, slowdowns in Korea, Thailand, and Singapore should reduce the world demand for oil to a 2.3% rise, from a 2.9% increase in 1997, says PaineWebber Inc. analyst Frank P. Knuettel.

At the same time, supplies look to be more than adequate to meet demand. In November, OPEC raised its production quota, and it expects to deliver 2.1% more oil to market this year than last. Plus, after falling short of expected gains in 1997, non-OPEC oil supplies should expand by 3% as a result of new production in the North Sea. "Demand is slowing a little, supply is growing a little faster. The net result is oversupply," says Nizam Sharief, research director at energy risk managers Hornsby & Co.

Iraq will continue to cast a shadow over world supplies. In November, it received the go-ahead for another six months of oil-for-food sales. With oil prices starting $4 a barrel lower than this time a year ago, Iraq could ship 10% to 12% more barrels merely by accepting the current terms. Plus, Iraq could sell an additional $1 billion worth of oil this year under a proposal now being considered. "It just puts more pressure on the market price," says Sharief.

DRILL TEAM. With the demand/supply ratio less precarious than last year, when Iraq halted shipments to protest payment delays, the outlook is for lower average prices. This year, a barrel of oil is expected to bring $19.74, about $1 less than 1997. The price of natural gas, too, should decline from 1997 levels, to about $2.17 per thousand cubic feet from $2.37, according to Wall Street estimates. Warns Enron Corp. CEO Kenneth L. Lay: "Over the long term, we don't expect any significant increase in real prices for oil and natural gas."

The worrisome outlook will show up in earnings statements. Analysts expect industry profits will rise only 5% this year, just half the rate of 1997. Worst off will be the nine biggest oil companies which, after a 9% earnings gain last year, should see profits drop 2% in 1998, according to Wall Street estimates compiled by First Call Corp. Some sectors, notably service companies and drillers, should continue their sizzling growth as the hunt for new oil continues. The rest of the industry will have to focus on cost-cutting and improved oil-well technology to better their fortunes.By Gary McWilliams in HoustonReturn to top

TABLE

Prognosis 1998

POSITIVES

-- Restructuring and alliances wring out costs

-- Refining and marketing profits brighten

-- Service companies and oil drillers should continue to grow as the hunt for new oil continues

NEGATIVES

-- The average price for crude, already off $4 a barrel from a year ago, should fall another $1 a barrel in 1998

-- Asia's economic woes could lower demand for oilReturn to top

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