Raymond James Energy Monthly - September
Sector Overview and Highlights
Subsequent to its all-time high at $78.77/bbl on August 1, 2007, crude oil fell steeply (by about 10%) during the following three weeks, largely due to credit concerns in the U.S., as well as speculation that OPEC was considering an increase in supply. Prices briefly trailed back below $70/bbl but, after the sharp sell-off, ticked up significantly during the last part of the month and into September. A number of drivers, including anticipation for sustained growth in the global economy and statements by various OPEC members that increasing supply is not necessary (for now), have propped crude prices back above $76/bbl.
Natural gas declined during August, supported briefly during the middle of the month above $7/Mcf from the threat of production disruptions in the Gulf of Mexico due to Hurricane Dean. After the risk premium for hurricanes softened, front month prices hit an 11-month low at $5.19/Mcf at the end of August on concerns of record-high storage levels. So far in September, gas prices have firmed up slightly (though they are flat year-over-year) on relatively bullish injection numbers and hotter summer weather. Additionally, Chesapeake Energy (CHK) announced that is it shutting in about 6% of its production, which indicates that a number of other producers may be curtailing supply, as well.
Stocks: After posting solid gains through the first half of the year, many energy stocks retraced some of their gains in August in conjunction with the pullback in natural gas, as well as liquidity/credit concerns in the US. During the second half of the month and into September, however, both the OSX and S&P 1500 E&P Index have rallied, in large part due to the renewed strength in oil prices. Given our bearish near-term outlook on natural gas, we believe that a further pullback, at least over the next month, is still realistic, especially given the fact that energy stocks have widely outperformed the broader market year-to-date. However, our robust longer-term commodity outlook on both oil and gas remains intact, and as we approach the end of 2007, we believe the 2008 outlook for earnings will increasingly drive stock price performance.
Raymond James' Energy Outlook: Our 2007 oil forecast of $65.54/Bbl reflects lower prices at the start of the year. We had originally expected oil to continue to firm as we move through 2007, and this has indeed materialized already, as crude prices have surpassed our projections in a shorter amount of time than anticipated. We believe oil prices will likely remain near $70/Bbl, if not higher, for the remainder of 2007 and going into 2008. On the North American gas front, our current full-year 2007 estimate remains at $6.70/Mcf, due to mild summer weather, unanticipated growth in U.S. production (as reported by the EIA), and an influx in liquefied natural gas (LNG) imports. Despite the near-term potential gas weakness, we still remain confident that natural gas fundamentals will drive prices back up meaningfully as we roll into 2008. For 2008 and beyond, we see gas prices averaging a more normal 7:1 ratio with oil prices.
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