The fate of oil and gas prices - what the bears are missing! Any comments?
From Upstream, January 29
upstream.tm
Hard winter 'holds key to price revival'
THE FATE of oil and gas prices is more dependent on temperature changes than on economic developments in Asia, the Middle East, Africa or Brazil, according to independent energy analyst Michael Smolinski.
Weather patterns hold the key to commodity and energy-related stock prices, Smolinski told the Houston chapter of the US National Investor Relations Institute last week. He believes that 1999 will bring average prices of $19 for West Texas Intermediate crude oil and $2.70 for Henry Hub gas.
Smolinski's argument could not be simpler. After two years of unseasonably warm El Nino-affected winters in the months when heating demand is greatest, "colder than normal temperatures for the past several weeks indicate to us that the warm El Nino pattern is over and that colder, more normal temperatures should be expected". He said in the US electricity generation the first week of January was the second-highest winter electric load ever.
"If the second half of the winter is more normally cold, we expect large quantities of energy to be consumed and the inventory surpluses to be eliminated." Electricity generation trends figured importantly in Smolinski's argument. "Nuclear output has peaked and coal-fired plants are reaching maximum capacities," he said. At the same time, US energy demand was increasing due to a strong economy.
US gas production, however, was estimated to be about 5% lower this year than last and he said that he did not expect imports to rise any faster than they did from 1987 to 1994. "We expect news of falling gas production to be one of the reasons given to explain higher than expected natural gas prices," he said.
Smolinski said he believed the oil price bottomed out during early December's very mild temperatures. "Two years of declining oil prices is reducing supply by voluntary and involuntary production cuts and lower drilling levels," he said.
"The bears are missing the fact that the US (oil) inventory has remained at the same level that it rose to last May when the first Opec production cuts began to be reflected in US data.
"If February is normally cold, the inventory surplus could be a shortfall by March." Smolinski had words of encouragement for the drilling and oilfield service sector, where share prices have been hardest hit by the drop in energy prices.
"The oil service stocks have moved with the price of natural gas," he said.
"We believe the price of gas is beginning a multi-year rise from the early December low that will again make the drilling and oilfield service stocks top performers.
"We predict that the direction of energy prices is now up from early December lows," he said.
Michael Smolinski was a sell side energy investment analyst for 10 years with Tucker Anthony and First Albany Corporation's F*A*C Equities and an energy economist for DRI/McGraw Hill's Data Resources. |
