Wednesday, May 04, 2005

Today's Oil Commentary.

Stephen Leeb
Leeb Capital Management

Stephen Leeb on Bloomberg earlier today discussing utilities and energy. He observed that on balance earnings have been good, and spending on oil service for exploration and development is growing. For utilities, higher energy costs are a mixed blessing. For a regulated utility like Duke with little ability to raise rates, higher energy costs will reduce their earnings. For deregulated utilities that have investments in alternative forms of energy, higher energy costs can give them leverage to improve profits. Two he mentioned positively were Exelon (nuclear) and Florida Power and Light FPL (which has investments in wind farms).

In terms of oil, his comments were similar to his last update, in that he sees 'a month or two' where we could trade in the mid to low $40's because demand is lower and OPEC is producing at 100%. But in the 3rd and 4th quarter he thinks prices could rise sharply. He sort of hopes he's proved wrong, because absent oil he believes there are no other negatives holding the market back, but "oil could overwhelm a lot of positives."

Parting quote: "I fear oil could really move up in a very dramatic way."

Tom Petrie
Petrie Parkman

CNBC ran "Pullback: Pause that Refreshes" as the tagline during his appearance, and Mr. Petrie believes that oil prices have dropped because of profit taking and because we're in the shoulder months of low demand where we normally build stocks/inventories. He believes this pullback will be self-correcting as looking forward there is a big gap between the forward curve oil futures, analyst's estimates, and the supermajor's projections. They displayed a graphic with three data items:

For the oil future's forward curve, from 2005 - 2008, the price line gradually sloped from near $50 down to the mid 40's.

For oil analyst's projections from First Call, the price line sloped from $40 in 2005 down to $30 in 2008.

For the projections of the supermajors (large oil corporations), the price band was $20 - $28 throughout 2005 - 2008.

Clearly there's some major disagreement there, and he was of the opinion that barring an economic slump, higher prices are more likely. He made two stock recommendations, Newfield Exploration (NFX) and Forest Exploration, both of which he said trade for less than 4x cash flow, and have 25-30% upside as they catch up with their peers.

CNBC's article on Tom Petrie's appearance here.

Peter Beutel
Cameron Hanover

Mr. Beutel was of a different opinion on oil prices. He believes we've 'broken the back' of high prices in the near term, and potentially in the longer term as well. He expects that prices will now trade down to around $40. The Saudis, he believes, indicated during their meeting with President Bush that they will not support any cuts in production in the near term.

Demand will start to rise after July 4th, but demand is showing signs of flagging due to high prices and supplies are rising. He made the observation that in the first 4 months of 2005, consumers have spent $15.5 billion more on oil than in the first 4 months of 2004, and that the young ('under 30') and the old are feeling the pinch first, and consequently cutting back their demand.