Not only has the near-term contract for West Texas Intermediate [WTI] crude oil traded in the $130 per barrel range recently, but prices have averaged more than $105 in 2008. In addition, despite a slow start to the year, oil has been above $100 since late February.
Rising geopolitical tensions, OPEC’s inability or unwillingness to boost production, tight product markets, strong demand from places like China and the Middle East, and a weak U.S. dollar have all been blamed, notes Raymond James analyst Justin Bouchard.
He admits that correctly forecasting where crude will go this year is a difficult task since prices have been very volatile and at times, disconnected from the underlying fundamentals. However, Raymond James believe that the tight supply/demand situation and geopolitical risk will keep oil elevated in the long term. As a result, the firm boosted its target by 18% to $120 per barrel for the second half of 2008 and to $130 for 2009 and beyond.
For NYMEX natural gas, Raymond James’ new 2008 forecast climbs 40%, or $3, to $10.50 per thousand cubic feet [mcf] in order to reflect the underlying tension between strong production growth in the U.S. and tighter storage levels during the summer.
Analyst Andrew Bradford told clients:
We think the market has a strong tendency to focus on the U.S. gas storage figures to set the tone on natural gas prices and related equities. On this basis, given the relatively low level of storage today, we don’t think investors will see much to dissuade them from a bullish stance.
For 2009, its target climbs $0.50 to $7.50, as the firm believes growing U.S. domestic gas production will lead to increasingly bearish gas storage figures in the winter.
The new forecasts result in higher price targets for all the exploration and producing companies Raymond James covers, as well as upgrades to “outperform” for four of them – Canadian Natural Resources Ltd. (NYSE:CNQ), Nexen Inc. (NXY), Compton Petroleum Corp. (CMZ) and Ember Resources Inc. [EBR/TSX].
The biggest price target increases come from the names with the highest potential growth in oil production during the forecast period, analyst Stephen Calderwood noted. These are large-cap Canadian Natural, intermediate TriStar Oil & Gas Ltd., (OTC:TOGSF) and juniors Bow Valley Energy Ltd. (OTC:BOWVF) and Masters Energy Inc. (OTC:MSYKF).
Raymond James’ price targets for oil and gas trusts climb an average of 12%. It believes Baytex Energy Trust (NYSE:BTE), NAL Oil & Gas Trust (OTC:NOIGF) and Bonavista Energy Trust (OTCPK:BNPUF) have the most flexibility in terms of higher distributions because of their superior balance sheets and lower payout ratios.