The price of a barrel of oil will average $115 in 2008, $120 in 2009 and $116.50 in 2010, according to UBS, which dramatically hiked its forecasts for West Texas Intermediate ([WTI] crude to a level now 25% above consensus for this year.
The analyst told clients:
We are abandoning the idea of a near-term collapse in oil prices under the weight of a U.S. recession.
The primary factor behind their bullish stance is the global energy market, with real demand growth for several key oil products rising this past winter, along with constrained supplies.
In a report the firm said:
The resultant tension on oil markets has not yet abated, while stress may continue to intensify this summer - and in any case should continue to play out again next winter.
It doesn’t anticipate any correction in oil prices until the middle of 2009.
UBS also boosted its normalized natural gas price to $9 per mcf from $7.25. Its analysts expect natural gas will be more volatile as North America plays a bigger role in the global market. In fact, the price range could be a wide as $7 to $14 per MMBtu.
We believe improved domestic natural gas demand trends, soaring coal prices and likely increases in the cost of electricity generation, and increased competition for LNG from the Asian Pacific region is driving natural gas prices upwards.
Canadian Natural Resources Ltd. (CNQ), Talisman Energy Inc. (TLM) and Nexen Inc. (NXY) are the top large cap picks at UBS, while it prefers Galleon Energy Inc. (OTC:GLNYF), Petrobank Energy and Resources Ltd. (OTCPK:PBEGF), UTS Energy Corp. [UTS/TSX] and OPTI Canada Inc. [OPC/TSX] among junior explorers and producers. Crescent Point Energy Trust [CPG.UN/TSX], Baytex Energy Trust (BTE) and Vermilion Energy Trust [VET.UN/TSX] are its top picks in the energy trust space.
However, among the names UBS covers, Canadian Oil Sands Trust (OTCQX:COSWF), Baytex, OPTI, Suncor Energy Inc. (SU) and Petrobank are the more crude oil-weighted names most impacted by the revised forecasts. Their estimated average cash flow per unit climbs 75.6% in 2009.