The fact that major Wall Street investment companies are forecasting a drastic drop-off in oil and natural gas prices in the second half of the decade, a drop-off that is not reflected in NYMEX futures, could create a stock market buying opportunity, Houston analyst John Olson told GasMart attendees in Denver last Wednesday.
Olson showed oil price forecasts by four major investment houses from 2007 through 2011 run 33-44% below futures projections, while the analysts consensus for natural gas run between 33% and 23% lower than futures. For instance, Goldman Sachs is predicting oil will go from an average $68/bbl in 2006-2007 to $35/bbl in 2008. A group of four investment houses, Bank of America, Goldman, Merrill Lynch and Morgan Stanley, have natural gas prices running from $7.14/Mcf to $5.89/Mcf from 2007 to 2011, while the futures forward strip has natural gas prices running from $10.61 in 2007 down to $7.65 in 2011.
The five-year average price going forward for oil based on the futures market is $69.56/bbl compared to Wall Street's forecast of $44.25/bbl and the forecast of energy bank lenders of $38.83/bbl. The five-year average of futures forward contracts is $8.72/Mcf, while Wall Street sees it as $6.34/Mcf and energy lenders suggest $5.73/Mcf.
Olson, chief investment officer for Poole Capital Partners LLC, the general partner of three equity hedge funds, says the analysts' projected price drop is not realistic. "The price structure would have to crater. There would have to be a super recession."
Instead, what Olson sees is no net demand destruction worldwide as the Far East increases its energy use. Even if United States demand remains flat, the country is expected to continue to see annual production declines of 350,000 bbl/d.
This will present a large stock market opportunity going forward as the large Wall Street houses are forced to upgrade their commodity price forecasts and at the same time the stock prices of producers.
The best measure of the health of the oil and natural gas sector, Olson believes, is the fairly simple measure of domestic wellhead revenues. Those have averaged $33 billion in the 1970s, $112 billion in the 1980s, and $82.9 billion in the 1990s. In the five years since the turn of the century average domestic wellhead revenues have doubled to $175 billion.
And domestic producer revenue forecasts have been steadily increasing for the five-year period from 2005 to 2010. In January 2004, producers were predicting average revenues of $148 billion; that projection went to $200 billion in January 2005 and has steadily increased in the months since to the latest average five-year projection for the period of $313 billion.
Olson sees the greatest opportunities in grass roots start-ups and the oil service industry. "Canada is a better incubator," because they don't have to deal with Sarbanes Oxley regulations that are holding back small firms in the U.S. "We're missing a big opportunity here." His hedge funds invest heavily in oil services and are increasing investments in small start-ups.
As always, there are dangers such as "asset bubbles and crazy money deals; politics, domestic and international; greenhouse gas; developments in Russia and what Olson called "the British Empire lesson," or the tendency of some companies to acquire anything regardless of the real value. "Beware of excess," Olson said. Part of the political hazards he pointed out were exemplified recently when Bolivia nationalized its oil and gas industry, which meant Spanish oil firm Repsol lost 50% of its reserves in one blow.
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