Analyzing the oil price analysts

Don Stowers
Editor-OGFJ

Someone recently likened the current global economy to a rollercoaster. No where is this more true than with oil prices. The petrocoaster has been on a long, steep dive since it peaked in mid-summer at $147.27 a barrel.

Lately I have been looking for positive signs amid all the gloom and doom from analysts and forecasters. But before I get into some of the specifi cs, we should take all forecasts – even mine – with a grain of salt and remember that some of these latter-day Nostradamuses were predicting $200 to $300 oil prices just six to eight months ago. If these analyst gurus were wrong before, their predictions may be equally off base today.

As this is being written in early January, crude oil prices have fi nally risen above $50, the highest level in more than a month. The 52-week range has been as low as $37.10 to the aforementioned high of $147.27, an incredible difference of $110.17.

Breaking the $50 mark is a plus for the industry, but is it a sign that oil will continue to climb? I’m hopeful because the Dow Jones industrial average and the Standard & Poor’s 500-stock index are both moving upward currently as well. Momentum, upwards or downward, is important when you consider that trading activity is greatly reactive to news accounts and geopolitical events that traders interpret as either positive or negative.

If I may be permitted to name names, Goldman Sachs equity analyst Arjun Murti predicted in August that crude oil prices would reach $150 to $200/bbl in 2009 due to increased demand and short supply, conditions that don’t exist now. Goldman has readjusted its forecast price to $45/bbl in 2009.

Morgan Stanley’s chief economist Stephen Roach predicts oil prices will average $82/bbl this year. This is about the highest prediction I have read. Roach, who is also head of Morgan Stanley Asia, also sees 2009 as a year of “severe global recession” and that any recovery in 2010 will be “tentative and anemic.”

Byron Wien, chief investment strategist for Pequot Capital, recently told CNBC that energy prices have bottomed out and that he expects oil prices to rise amid a general economic rebound. “I think [energy prices] will be higher next year, possibly a lot higher, because I think the world economy will recover late in the year,” said Wien.

Bloomberg believes oil prices will rebound to average $60/bbl in 2009, a forecast that is based on the median of 33 analysts surveyed.

The Department of Energy, which had formerly forecast an average oil price of $101.45 for 2009, revised its forecast last month to $63.50.

Daniel Yergin, chairman of Cambridge Energy Research Associates and author of The Prize, a history of the oil industry, says that prices have come down so far and so quickly that the supply system has been shocked. As a result, major oil and gas projects have been suspended or canceled in recent weeks as companies adjust to new realities, including gasoline prices as low as $1.19 a gallon for regular grade fuel in Houston in early January.

Drilling budgets for 2009 have been drastically reduced from 2008 and some producers are shutting in wells until prices recover. New refi neries have been postponed in Saudi Arabia, Kuwait, and India, and some ambitious offshore drilling projects in West Africa are being reevaluated.

Even alternative energy projects that have fl ourished in recent years are being curtailed, in part due to low fuel prices and partly due to reluctant lenders.

Another reason that energy projects are being put on hold is that construction costs, which have surged in recent years, are still high despite the drop in oil prices. Companies are choosing to wait for those costs to fall before moving ahead with new projects.

Oil and gas executives say they will cut back on exploration and production in 2009, although by no means are they dropping exploration plans completely.

In announcing its exploration and development budget for 2009, Frisco, Tex.-based Comstock Resources says it plans to drill about 76 wells this year and the company will focus on higherreturn opportunities, including its assets in the Haynesville Shale.

“Our 2009 drilling program is focused on continued exploitation of our East Texas/North Louisiana acreage position, including proving up the emerging Haynesville Shale play and continued development of our properties in our South Texas region,” said M. Jay Allison, Comstock’s chairman and CEO.

Given lower natural gas prices, the company plans to defer much of its Cotton Valley development drilling, which was the biggest contributor to its production growth in 2008.

In the short term, some analysts predict an outright contraction in global oil and gas demand in 2009, as banks continue to cut credit to consumers and corporations. However, tensions in the Middle East and Russia’s decision to reduce gas supplies to Europe can cause prices to spike at any time. Stay tuned.