Can Oil Prices Stay Healthy?

Oil prices and energy stocks are being hammered on fever-pitch fear about a global economic slowdown, but fear not oil investor, energy prices will stabilize soon enough, according to a new report from Wellington West Capital Markets. 

Wellington West analyst Kim Page told clients in a note:

In the near-term, we remain concerned that further price erosion is likely as overall economic turmoil continues to unfold. Over the medium to long-term, we believe the secular trend of rapidly rising energy prices is likely to resume, as industrialization continues to drive global oil demand growth whilst new supplies remain increasingly more expensive to produce.

While Mr. Page reduced his WTI oil price estimates by 10% in 2008 from $122.80 to $110.07 and 20% in 2009 from $125 to $100, he is quick to point out that oil prices, on a relative basis, still remain healthy.

He wrote:

We remind investors that oil and gas prices remain above long-term trend lines even after the recent sharp correction, and many projects remain economic at current spot prices.

Equally as important, the revised price forecasts for  Oct 1 are not a long way off from the year-end 2007 price forecast for Jan 1 when most borrowing base limits are set by the banks, who also rely on industry price forecasts for assessing lending limits/margins.

On that note, Mr. Page added that based on his research, most credit facilities with the major banks are in good shape in terms of debt/cash flow covenants, percentage drawn versus un-drawn, and portfolio weightings despite tightened debt markets in most sectors.

Comments

[Ferdinand E...:]

Absolutely correct. Oil prices are still healthy, and when economic growth gets back in the groove, they will turn up again. Anyone who believes that the present fall in oil prices is a tragedy for OPEC producers should go into their local library and see what the Financial Times or Wall Street Journal said about the situation for oil producers 4 or 5 years ago. They were dreaming about getting the price up to $28/b.

2008 Oct 08 02:12 PM

[Larry House:]

I have positions in two energy funds, and I am going to add to them as the price comes down. Energy stocks should move up right after financial stocks do when growth is once again in sight.

2008 Oct 08 03:46 PM

[mangolfer:]

In the mean time oil price should keep dropping....

2008 Oct 09 08:34 AM

[scammy:]

Talk about a dreamer.. His targets are a joke. China stopped importing gasoline a couple days ago..!!!! Oil is headed back to where it was BEFORE the big speculation, $65.. That price was with a good economy. With a world on its back, $45 might be possible..!!!!

2008 Oct 09 12:05 PM

[JasonC:]

This in on a par with expecting Phoenix house prices to rapidly snap back to $350,000. Utter denial. Demand is gone, the money supply is going, there never was any justification for the absurd bubble prices in the first place, and there isn't the slightest chance any of them will stick.

2008 Oct 09 03:43 PM

[cjct:]

Scammy is absolutely correct. Oil was 65 during the roaring global economy of 2007...how on God's green earth can it stay at 80 in the midst of a global recession in 2008. I'm sorry dreamers, demand isn't growing "unabated." The notion that oil consumption wouldn't be affected by a global economic slowdown is just silly and everyone who has said that should join Lehman and Bear employees on the unemployment line.

2008 Oct 11 06:06 PM

[BxCapricorn:]

How can oil stay at $80/barrel? Demand is decreasing, so guess what supply is about to do. It's almost as if a cartel and various oil suppliers have an interest in maintaining higher oil prices.

2008 Oct 18 06:57 PM