Government Forecasts Bullish Oil Price

The U.S. Energy Information Administration [EIA] forecasts a long-term oil price before
adjustment for inflation of about $60 a barrel, in line with our estimates of present value, that lead us to recommend oil and gas producers like Lukoil (LUKOY.PK) and Gazprom (OGZPF).

The EIA backed up its analysis with a 226-page study released last week, Annual Energy Outlook 2007. The agency points out that its $60 forecast relies on rapid growth in high-polluting coal on the unrealistic assumption there would be no new environmental restrictions. We think the $60 forecast may also be low because its optimism on new oil and gas supply seems to conflict with the intensifying reality of mega projects doubling in costs, taking longer to complete or being canceled outright.

As a result, the EIA also presents an upside case that reaches $100 a barrel before
adjustment for inflation, thus moving in the direction, but not reaching, our “vision” of
$150 after adjustment for inflation in the next few years. Besides our Russian ideas,
some good old, exclusively American producers include buy-recommendations XTO
Energy (XTO) and Berry Petroleum (BRY). Meanwhile a trend reversal to the upside
may be in the making as six-year futures approach the 40-week averages of $67.70 a
barrel and $7.88 a million btu (see weekly graphic below).