Muted Energy Forecasts for 2009, 2010

The sky-high energy prices seen last summer are but a distant memory as First Energy Capital has revised its outlook down for the world natural gas market, while the crude oil market shows no sign of returning to 2008's $144 a barrel.

In 2009, expected average prices for natural gas have been dropped to $4 per million BTU, a change of 50 cents. The reduction in 2010 is 75 cents to $7 per Mmbtu. For years beyond 2010, the cuts get bigger rising to $2-$3 per unit, for a long-term price of $8.50.

"We are calling for a bottoming of natural gas prices later in Q3 2009 as terrible market fundamentals in the short term," the Calgary-based energy analysis firm said in a note Monday. A growing supply of gas in the United States will also factor into depressed prices, but investors can take some solace in the possibility this may create an attendant increase in demand, the note said.

As for crude oil, First Energy has raised the 2009 forecast for benchmark West Texas Intermediate (light sweet crude) to $58 per barrel, a modest $3 increase. Otherwise, expectations remain the same: $75 per barrel in 2010, and $85 in 2011. The long-term price target holds at $120 a barrel after 2013.

The note said:

The 2008 price surge was more a function of runaway risk taking, U.S. dollar depreciation, and investor fund flow that thoroughly disconnected prices from the fundamentals, and ultimately led to the demise of prices by the end of 2008.

This is a good time for investors to "wade in" to the space. If an investor is long, they should either add to their position or hold, as current prices are more indicative of "constructive and slowly improving fundamentals" and will not drop to $30-$40 a barrel as some fear, the note said.

Comments

[The Greates...:]

Considering that gasoline inventories are working on a three month high, I do not think that the summer of 08 is that distant of a memory.
Congressional hearing's on speculation in the summer of July-Aug 09 could re-instate more oversite in the energy sector. The progessive recession that just keeps going and going. Plus crude oil pricing since Feb have been on life support with out a good prognosis.
The second half of this year will be a long haul.

Jul 13 02:30 PM

[Larry House:]

I agree with "wading in," gradually. If patient, energy stocks have a good a chance as any or rewarding the investor.

Jul 13 08:58 PM

[A Barrel Full:]

Short term : Bearish
Long Term : Bullish

Energy really is a macro economy play. When the world starts growing again, crude prices will rise rapidly. Gas prices dance to a different tune however, and need new consumers in order to rise. That needs new infrastructure and new generating capacity.

Jul 14 01:29 AM

[bowman711:]

In the short term, anything can happen to the price of oil - e.g. a further sinking into recession would surely cause the price to go lower. A significant political or military event - such as an Israeli attack on Iran's nuclear program - would certainly cause a sharp spike in price.

Long term, there seems to be nothing but higher - much higher - prices:
1.) The massive inflation of the money supply, when the economy starts to recover, will surely cause higher than normal inflation in all commodities.
2.) When the economy starts to recover, there will be an investment rush into commodities as manufacturing firms begin to replenish their supply of raw materials - such as oil for plastics.
3) A recovering economy will need oil for fuel to transport commodites to manufacturers, and products to consumers.
4.) Numbers 2 and 3 will be magnified by the growth in the China, India, Brazil, and other 'new' economies competing for limited raw materials.
5.) The low prices of oil for however long it takes for a recovery will sideline exploration and development of oil, so when the economies recover, there will be a reduced supply for a world clammering for energy to produce products and bring them to market. Economic shortage means higher prices to deal with the demand.
6.) Consumers will have put off travel during the hard times, so they will have a pent up 'demand' for travel (or just taking a Sunday afternoon drive), further increasing the demand for gasoline.

Traders can play the short term changes in price; long-term investors can hardly have a better investment than oil and commodities. [The only 'wild card' is if the Obama administration can succeed in destroying enough profit-motivated business to cause businesses to decide to not continue to produce consumer goods because the profit is taxed or regulated away.]

Jul 14 12:34 PM

[basehitz:]

I'd like to think fundamentals drive this, but technicals seem to rule the day. Daily observation of trading action suggests:
- as markets rally, the dollar sells off as a "safe" haven.
- in reaction, energy and all commodities move opposite the dollar.

We've got abundant storage of oil and gas. Traders speculate on timing and strength of recovery. Short term quick moves create trading opportunities. So I swing trade energy and the international drillers around core positions. Eventually, I expect to see much higher prices.

Next week the drillers start to report. Opportunities are expected.

Jul 15 07:18 AM