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Bullish Fundamentals Longer Term to Drive Energy Shares Up -- Raymond James

Oil and natural gas prices have been down in recent weeks on mild winter weather, which could spell an earlier-than-normal end to the seasonal strength that historically carries energy stocks through April. However, bullish fundamentals longer term will ultimately drive company shares higher in 2006, Raymond James analysts said in a report Monday.

The energy brief by J. Marshall Adkins, John Tasdemir and Parag Sanghani differs from an analysis last week by Sanford C. Bernstein & Co., which is forecasting a steep decline in exploration and production company shares over the coming months (see Daily GPI, Jan. 9). Bernstein analyst Ben Dell said the pressure on stocks this year will come from rising service costs and continued lower commodity prices.

Raymond James analysts also expect to see downward pressure on commodity prices and stocks in the March/April timeframe, but "we believe that fundamentals will ultimately be a stronger stock price driving force than historical seasonal trading patterns." Even if there is an oil inventory-driven sell-off in the early to late spring, "we think it should be viewed as an opportunity to buy." Eventually, the Oil Service Sector index (OSX) and the Standard & Poor's 1500 Oil & Gas index will post 20% to 30% gains from year-end closing prices.

"Going forward, we think the weather forecasts (which also drive commodity prices) will continue to drive the stocks," said Raymond James' analysts. "Additionally, our current oil supply/demand model shows oil inventories building rapidly beginning in March, driving the need for another OPEC production cut. As we highlighted in our previous Stat of the Week (see Daily GPI, Jan. 4), this will likely take oil prices nearer to $50/bbl, which means a 15-20% pullback from Friday's close."

Then, if OPEC announces a production cut at one of its next two meetings in late January or early March, "we could see a rebound in stocks and commodity prices that sets the next bullish phase for energy stocks." Any seasonal weakness in the coming months will offer an opportunity for investors to add to their energy positions, the analysts noted.

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