Bullish on oil, less bearish on natural gas
Raymond James’ April energy price outlook is less bearish on natural gas and more bullish on oil. The firm’s research division says the outlook for summer gas prices has improved substantially due to lower gas storage levels than expected. RJ analysts contend that bullish year-over-year LNG comparisons should help support US natural gas prices into June. As a result, the firm is raising its 2008 natural gas price forecast from $6.50/mcf to $8/mcf. However, RJ now thinks there is a 50/50 chance that gas prices will collapse later in the summer. If summer weather is warmer than the 10-year norm, gas prices will hold in the $10 range. If temperatures are colder than the 10-year norm, they may slide into the sub-$6 range late this summer.
The firm’s forecast for oil has been more bullish than the street, and RJ notes that it has consistently underestimated oil prices. Oil prices have remained stubbornly high, and high oil prices are justified by very solid supply/demand fundamentals. As a result, the firm has revised its 2008 oil forecast from $90 to $100 and raised its 2009 oil outlook from $100 to $110.
Wood Mac sees oil-gas price link returning
In a presentation to the annual American Association of Petroleum Geologists conference in San Antonio last month, Wood Mackenzie’s Ed Kelly said that he believes North America’s domestically-produced natural gas will be consumed by a growing demand for gas-fired power generation. This, in turn, will trigger the need for more LNG imports. When that occurs, US gas prices will then become linked to worldwide prices for LNG cargoes – prices that are set by indices, including those for crude oil prices. Under present market conditions (oil prices over $100/bbl), a re-linkage of natural gas and crude oil prices would mean gas prices in the vicinity of $13-$14, Kelly added.
Petrobras puts Ecuador investments on hold
The socialist government in Ecuador has ticked off another oil company and undermined development in that impoverished South American country. Brazil’s Petrobras has put on hold some $535 million in planned investments in operating fields in Ecuador while it waits for a solution to its contract dispute with the government of President Rafael Correa Delgado, an ally of Venezuelan leader Hugo Chavez. Ecuador has accused Petrobras of breaking legal regulations by transferring exploration rights to Japan’s Teikoku Oil Co., a unit of Imperial Holdings Inc. in 2005. Petrobras and Teikoku signed an agreement that year to transfer 40% of Petrobras’ rights in Amazon oil Block 18, the Palo Azul oil field, and Block 31. Petroecuador has formally started a process to end the Petrobras contract in Block 18, including the unified oil field Palo Azul. Petrobras produces about 35,000 barrels of oil a day in Ecuador.
Ecuador’s Correa has promised to renegotiate contracts with foreign oil companies in order to free up money for spending on health, education, the environment, and housing. Another priority for Correa is Ecuador’s foreign debt, estimated at over 25% of the country’s GDP. Correa has suggested that at least part of the debt may be illegal and is planning to renegotiate or possibly default on it. He has also called for an international debt tribunal to prevent the exploitation of debt-ridden countries and has threatened to cut ties with the World Bank and International Monetary Fund.
Credit crisis is now global
The credit crisis on Wall Street seems to be expanding internationally. As an example, Swiss banking giant UBS has been hit hard with mortgage and credit losses of $37 billion. In response, the bank says it may cut as many as 2,200 jobs worldwide, many in the firm’s investment banking division. Meanwhile, London’s stock market is bracing for as many as 40,000 payroll cuts. Some banks have warned that lending could decrease by as much as 50% this year. “Nothing of this scale has happened since the Great Depression,” said Washington Mutual CEO Kerry Killinger. “This is the toughest cycle I have seen in my years in the industry.”
North American drilling outlook improves
Speaking before a crowd of energy executives at the Howard Weil Energy Conference in New Orleans last month, Schlumberger CEO Andrew Gould said that natural gas exploration and production spending is set to increase in the US and Canada. This is part of a global trend toward more high technology and energy investment, he said.
“The outlook for North American natural gas has improved considerably due to low storage levels, declining LNG imports, and declining production in Canada,” said Gould. The “need to drill” concept is taking hold worldwide as high energy prices open up new areas for exploration and old producing fields began to fade.
Noting that most worldwide reserves are under the control of national oil companies, Gould said that when NOCs raise taxes or take away control from international companies, the result is slower investment from the majors and independents. However, “Only a major worldwide recession can have an effect on the E&P industry as far as global oil demand is concerned,” he added.