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Raymond James Sees Continued High Price Levels, Holds to $5.50/Mcf in '04
Last year was one of the best ever for energy industry fundamentals, and investors' growing recognition of commodity price sustainability supports the theory that 2004 will be even better, with natural gas prices forecast of $5.50/Mcf, according to Raymond James analysts.
In the latest Stat of the Week, J. Marshall Adkins, Wayne Andrews and Jeffrey Mobley forecast "a broad continuation" of last year's commodity price levels, with the global economic recovery creating a demand environment. Crude oil and natural gas supplies are expected to remain lower to flat, they said, which will continue a "substantial and we believe fully sustainable upward move" in prices.
"We believe that the constrained gas supply outlook means gas prices will remain strong," said the analysts. With domestic production last year marginally lower year-over year, and "this trend shows no sign of change." Raymond James is forecasting a production decline this year of 1-2%, and "as a result, gas prices are likely to remain at 2003 levels, as above-average storage injection demand competes with growing industrial and power generation demand."
The analysts are maintaining an earlier gas price forecast of $5.50/Mcf, which is "19% higher than consensus expectations of $4.63/Mcf, but we believe is fully warranted by industry fundamentals...We view the consensus estimate as far too pessimistic, just as it was at the beginning of 2003."
Although energy stocks languished for most of the third quarter and into the fourth quarter, the analysts said that increases in natural gas prices, combined with sector rotation, spurred investor interest in exploration and production (E&P) and oilservice shares toward the end of the year. "We believe this was due to investors' realization that (1) today's commodity price levels are sustainable, and hence, (2) many E&P and oilservice companies are trading at deep discounts to their intrinsic value. We believe that energy equities will make significant gains well through next year as our commodity price thesis continues to bear out."
For 2004, Raymond James is forecasting that the companies in the E&P sector will gain 25% overall this year, while oilservice shares will be up 40%.
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