Following the roller-coaster ride that crude oil prices have been experiencing over the past few weeks, Salomon Smith Barney’s Robert Morris said that crude prices continue to be the “fulcrum” for exploration and production company stock performance. The analyst pointed out that E&P shares extended their retreat two weeks ago as both crude oil and natural gas prices dropped sharply.

After beginning the April 8th week on an upward trend after Iraq announced a 30-day export embargo, oil prices began a descent after Saudi Arabia and other OPEC members vowed to maintain output. Morris added that this was followed by a build (both absolute and relative) in U.S. crude oil plus product inventories for the second straight week. Oil prices were knocked lower again on April 12 when Venezuelan President Hugo Chavez was ousted, producing fear that a new regime would break from OPEC and set the country on a course to ramp up oil production. However, the change in power was short-lived as Chavez was back in control by April 14. He did indicate that some changes would be forthcoming.

“Thus, while oil prices may regain some their recent losses during the early part of this week, it has yet to be seen whether any compromise is made with those in Venezuela who have called for an increase in oil production,” Morris said in SSB’s Exploration and Production Weekly. “We believe that President Chavez will maintain his allegiance to OPEC and continue to adhere to the current quota agreement though.”

Along the natural gas front, Morris said that a broad lack of demand during the current “shoulder” period, combined with the technical and psychological influence from the drop in oil prices weighed on prices earlier this month. “Overall, we expect natural gas prices to continue to subside near term, while all eyes will soon begin to turn to the first quarter domestic production figures and companies’ outlook for the remainder of this year during upcoming first quarter conference calls,” Morris said.

He said that while oil prices are likely to remain volatile with each headline out of the Middle East or Venezuela pushing them in “one direction or the other,” the risk remains that the current strength persists or that oil prices begin to climb back toward their recent highs. At the same time, Morris said he believes that the longer-term fundamentals for natural gas prices remain solid. “Thus, we would not advocate reducing exposure to this sector for those with a longer-term horizon, although we would continue to be patient in adding to positions at this juncture,” he said. “Importantly, we believe that it will continue to be the direction in oil prices that will be the fulcrum for E&P share performance near term.”

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