“None of the historical correlations analysts have used – inventories primarily for oil, storage for natural gas, natural-gas and oil prices for rig counts — work,” said Jim Wicklund, managing director of energy research at Banc of America Securities.
“No one can really explain, with anything but a very broad brush, why crude oil prices are as high as they are.”
Pointing to the Energy Department and American Petroleum weekly U.S. inventory reports, James Williams, an energy economist at WTRG Economics, said nothing in the data supports prices at this level. See Futures Movers.
That view is widely shared. Nevertheless, the benchmark light, sweet crude oil contract for April delivery finished the week up 10 cents at $51.49 a barrel despite the Energy Department’s report of a build in crude supplies. For the week, the contract was up 5 percent.
A few analysts upped their price forecasts this week, including Deutsche Bank and Prudential Equity Group. Prudential increased its outlook for 2005 oil to $42 a barrel from $35 amid an upgrade of integrated oil stocks. See Ratings Game.
Still, analysts polled by Thomson First Call said they expect oil to average $40 a barrel. That’s $1 higher than the January estimate and $2.43 more than the December estimate. See archived story.
Raymond James is ahead of most brokers’ estimates with a $44 oil price forecast for 2005.
“But we’re still too low,” said Marshall Adkins, managing director of energy equity research at Raymond James. “There has been a fundamental shift in the oil markets.”
One reason for the disparity between forecasts and the current price of crude is a bias on the part of analysts. Most analysts believe that oil will return to normal levels, though he said there’s no longer a good way to gauge what is normal.
“This time is different than other times,” Adkins said. “We’ve always had an oil bubble in our existence, where there was more supply capacity than demand, and that’s essentially not the case anymore.”
Secondly, demand from China has skyrocketed. And thirdly, in some areas of the world, supply growth has hit a wall.
Analysts are biased in another way.
“We’re as guilty of this as anyone,” Adkins said. “As analysts, you would rather be too conservative on your forecasts than too aggressive because you have to do more explaining on the high side than on the low side.”
Even oil and gas equity investors aren’t factoring in $50 oil or $7 natural gas into their equations, though the meteoric rise in the share prices of those companies, including Exxon Mobil Corp. (XOM: news, chart, profile) , give some pause. See Energy Stocks.
Adkins estimated that most investors are still using $30 oil and $5.50 natural gas prices as their market yardsticks.
“If you plugged in $50 oil and $7 gas into the numbers for exploration and production companies and the majors and carry that through to the service companies, you would end up with phenomenally large earnings,” he said.
Under that scenario, oil and gas earnings would account for 20 to 25 percent of all S&P 500 earnings. Last year, they accounted for about 15 percent of the S&P 500 earnings.
Looking ahead, Raymond James has an oil price forecast of $40 for 2006 and beyond.
“We view that specifically as a floor, recognizing that in all probability, the prices will be meaningfully higher,” Adkins said. “It’s a floor because that is the price OPEC now seems willing to defend.”
