Looking for the silver lining

Don Stowers
Editor-OGFJ

I like to think of myself as a cynical journalist – not a wild-eyed Pollyanna. My spouse often accuses me of seeing the coffee cup as half empty rather than half full. When I’m going over the family finances, I always try to take into account a worst-case scenario, which aggravates my wife to no end. In short, no one has ever mistaken me for an irrepressible optimist.

And yet, I’m somewhat conflicted now. I told one of my colleagues recently that I believe the current economic recession will not last long and we’ll start to see conditions improve this year. Do I have any hard evidence of this? No, not a smidgen of facts to back up this “feeling.”

Normally, I’m not the kind of guy who pays much attention to feelings when it comes to the economy or finances. When the bank account is getting low, one of the kids is away at college and asking for more money, and the car requires major repairs, I don’t get the “feeling” everything is going to be okay. I’m a numbers guy and I get out the calculator to see where the money is coming from. Then I grudgingly take some funds out of savings to deposit in my son’s debit card account and fork over the dough to get the old Audi fixed for the umpteenth time.

So I can’t explain exactly why I think the economy has bottomed out and will start to improve soon. I have no proof – only anecdotal evidence that I have gleaned from reading and conversations with people who seem to know what they’re talking about. However, this leads me to believe that conditions will start to turn around soon – especially in the oil patch.

In case you haven’t noticed, oil company stock prices have been moving slowly upward. Most are nowhere near the levels they were at this time last year, but they are creeping up from the abyss they had fallen into in December and January. Oil producers tend to be doing better than gas-heavy companies because oil is also inching upward while the gas glut has kept natural gas prices stagnant.

A number of petroleum economists are predicting $80 to $90 oil prices by the end of the year. As I mentioned previously in this column, Mike Smolinski, an analyst with Energy Directions in Phoenix, recently said he wouldn’t be surprised to see $80 oil by the end of April.

Not everyone agrees that oil prices will rise so high or so quickly. In its latest Global Markets Research report, Deutsche Bank says a sharp recovery in oil prices towards $80/bbl in 2011 remains possible, but is highly dependent on a strong economic recovery starting in 2010. It says the consensus in oil price forecasts is $50 in 2010 and $65 in 2011.

Noting the recent increase in oil prices, Raymond James Equity Research says that oil’s rebound has helped the oily stocks outperform the gassy ones. “Given our outlook, oily stocks should continue to outperform in 2009,” says the report.

Gas bearishness is almost universal. The prospect of sub-$3 gas is no longer a question of “if” but “when,” says RJ, which predicts summer gas prices will fall to $2.50/Mcf or lower. “The reality is that US gas producers will be shutting in production this summer,” the report concludes.

In a recent presentation in Dallas, Matt Simmons reiterated what he has been saying all along – that long-term supply trends for oil will get uglier. Noting that the majority of the world’s oil comes from 356 super-giant oil fields that are almost all “past their prime,” Simmons says oil prices are “dangerously low” because they discourage drilling and production. This encourages market volatility, which in turn can cause catastrophic economic damage.

Simmons has a point. Low prices have put some projects on hold, drilling rigs are being laid down, and employees are being laid off from a workforce that was already thin. As soon as demand begins to recover, oil prices may rise faster and higher than ever. It’s just a matter of time.

Taking all this into account, my own outlook for natural gas remains negative for the near term, but oil prices should continue to recover and may even soar past $150, this time due to simple supply-and-demand issues rather than market speculation.

I guess that makes me an optimist. Just don’t call me Pollyanna.