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Raymond James Analysts Expect $8/MMBtu Average Henry Hub Prices Next Year

Despite already pushing gas and oil price forecasts well past Wall Street consensus estimates, analysts at Raymond James & Associates once again raised their short-term predictions for crude oil and natural gas prices based largely on low OPEC productive capacity, maturing non-OPEC production areas and a much tighter link between oil and natural gas prices.

"OPEC's excess capacity is the lowest in three decades," said Raymond James analysts J. Marshall Adkins and Wayne Andrews. "This is the main driving factor behind our optimism about longer-term oil prices. As rising demand, particularly from China and India, has outpaced non-OPEC supply increases, the resulting increase in OPEC production has left the world with an extremely low level of excess production capacity.

"Like the natural gas markets in the mid-1990s, the oil market finally appears to have worked off its supply bubble to the point where oil prices have moved to a higher sustainable level for the long run. In fact, with OPEC's tightening surplus capacity likely less than 1.5 million b/d (of marginal quality crude), the supply/demand equation has tightened to the point that there is no room for any significant supply disruptions."

As a result, Raymond James analysts raised their oil price forecast for this year to $51/bbl from $48 and boosted the prediction for prices next year to $52/bbl from $47/bbl. The current Wall Street projections are $47.92 this year and $41.52 in 2006, or $10.48/bbl below the Raymond James prediction.

Raymond James maintained its $6.86/MMBtu Henry Hub gas price forecast for this year but bumped up by 50 cents to $8.00 its prediction for 2006, compared to Wall Street consensus estimates at $6.58 for this year and $6.41 in 2006.

In comparison, the Energy Information Administration is predicting that Henry Hub prices will average $6.88 this year and $7.13 in 2006. Consultants at Energy and Environmental Analysis Inc. said that they are expecting Henry Hub prices to average $6.45 this year, $7.50 next year and $8.50 in 2007 (see NGI, June 20). And last week Prudential Equity Group raised its ratings on exploration and production companies to "favorable" from "neutral" and lifted its commodity price forecasts to $6.50/Mcf for gas and $50/bbl for crude oil through the rest of 2005 and into 2006.

"Going forward, we believe that natural gas will be linked much more closely with oil prices than we have seen over the past decade," analysts at Raymond James said. "Specifically...we believe that in a normalized weather scenario, the midpoint of U.S. natural gas will be linked to oil prices with a 6:1 BTU parity price ratio."

The Raymond James analysts said that a larger amount of weather sensitive gas demand exists today than did a few years ago as "price-sensitive demand has been rationed, primarily from industrial customers." The analysts predict that gas prices will begin to increase in the second half of the year as normal weather begins to bring down the gas storage surplus and the underlying supply/demand fundamentals become more apparent.

Prudential also raised its earnings estimates for producers on average by 9% in 2005 and by 13% in 2006. Analyst Jason Gammel wrote in a research note that Prudential believes "there are very few supply-side risks to the high-price environment," and "very few visible sources of incremental oil supply that would negatively affect pricing conditions."

Commodity prices are expected to remain high for the next 12-18 months, and as a result, producer earnings and cash flow also are adjusted higher, Gammel told clients.

"This dynamic should give the stocks the ability to trade toward what we had previously defined as our upside potential," he wrote. Although natural gas fundamentals "are not as robust...we believe that natural gas prices will continue to be supported by the overall petroleum complex." Prudential substantially lifted the price targets on 12 oil and gas stocks that it covers.

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