The management at Exxon (XOM) are good guys. They plan to invest in almost two dozen new projects to increase oil production over the next three years. This will push capital spending at the company to $20 billion per annum. Exxon also says that the big oil-producing countries like Saudi Arabia are doing their part to increase production.
In addition to all of this good news, Exxon’s CEO says that oil is about $20 per barrel higher than it should be because "With the price today and over the last years, what the market is saying is they’re uncomfortable with the reliability of supply." So, the rational price for oil is about $40 a barrel and not the $60 where it trades today.
But, Exxon claims that, if anything, the oil companies and big oil producing nations are adding more capacity, so the connection between supply and price should actually be cutting the other way, toward lower oil prices.
It may be nice for Exxon to have oil at $60, but its explanation for why it sells there seems to lack much much reasonable support. Except that it is more profitable.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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