Since 2004, crude prices have had a heady ride in the market, with oil hitting $78-plus last summer. However, what about the pricing outlook for that commodity not only this year but longer term? And, are natural gas prices-which soared to $15 in January 2005-headed for a major slide near-term due to the gas-storage overhang?

Recently, Oil and Gas Investor posed these questions to Bernard J. Picchi, senior managing director and energy equity research analyst for Wall Street Access. The New York-based registered broker-dealer is an NYSE-member firm offering independent research, execution, fixed-income trading and professional money management to both institutions and affluent individuals.

A graduate of Georgetown University with an undergraduate degree in foreign service, Picchi was managing director and head of energy research at both Salomon Brothers and Lehman Brothers during the 1980s and 1990s. For 12 consecutive years during that period, his research was cited as best-in-class for energy by Institutional Investor magazine.

The chartered financial analyst has also made frequent television appearances to discuss energy on Wall Street Week, Nightline, Today and The MacNeil/Lehrer News Hour. Just prior to joining Wall Street Access, he was senior managing director for energy research at Foresight Research Solutions LLC in New York.

Picchi's long-term macro outlook for the oil and gas industry? "If the IEA (International Energy Agency) is right that the demand for oil is going to be 116- or 117 million barrels per day by 2025 or 2030, then [OPEC and non-OPEC suppliers are] going to have a very hard time meeting that demand level. So for the moment, we may be in a cyclical downturn for oil pricing, but I'm not sure how long that's going to last."

The energy guru makes the case that long term, the price of oil is likely going to have to remain high to encourage development of all the other energy-supply alternatives.

This, however, is but one of his observations on energy. His sanguine outlook for natural gas is just as interesting for independent producers and the oil-service companies that support them.

Investor What's your global outlook for oil supply and demand in 2007 and the implications for crude prices?

Picchi Oil demand will likely increase between 1.5% and 2% for the year. As for supply, it's going to be challenging for OPEC to keep up with that rising level of demand.

Yes, there has been a lot of talk about non-OPEC supplies increasing at a faster rate than demand, but what we've seen recently has been a disturbing trend, with non-OPEC production coming online later and at lower quantities than project sponsors have forecast. If that trend continues, the markets are going to remain fairly snug.

The wild card, of course, is how much both supply and demand will be affected by conservation and the increasing supplies of alternative fuels such as ethanol, biomass or biodiesel.

Investor What about the longer-term outlook for oil supply and demand?

Picchi The International Energy Agency (IEA) just put out its long-term forecast for energy demand through 2030. It pointed out that non-OPEC supplies will probably peak sometime in the next decade. If this were to occur-combined with its forecast of roughly 1.25% annual growth in world oil demand during the next 25 years-that would really put a tremendous burden on OPEC to meet global oil demand.

In short, we're talking about OPEC production within the next 25 years having to rise to well north of 60 million barrels per day. Based on history, I'm skeptical that the cartel could ever do that. During the past 40 years, OPEC as a group really hasn't increased productive capacity very much.

Investor The implication of this for crude prices?

Picchi Short of a recession or enforced conservation coming about, oil prices should remain fairly high, in the range of $50 to $60 during the next year or so.

Investor Similarly, your outlook for natural gas supply and demand?

Picchi Since natural gas is more of a regional commodity, the outlook for it is actually better than for world oil. In the U.S., we're running very hard just to remain in place when it comes to supply. By that I mean we're drilling more and more wells, but the reserve adds from those wells are continuing to decline.

For 2006, we'll probably have around 30,000 gas-well completions in the U.S., a record number, up from about 10,000 wells drilled and completed annually some 10 years ago. Yet, during that time, the reserves added per well have fallen by about 50%, from 2 billion cubic feet (Bcf) per completed gas well to a little more than 1 Bcf. So the reservoir targets appear to be getting smaller.

And as far as the so-called overhang in gas-storage, that's almost trivial. People focus on the 3.5 trillion cubic feet (Tcf) of gas in storage. But the reality is that this inventory is only 300 Bcf higher-about four days of U.S. supply-than the 3.2 Tcf we would need anyway.

Investor What about the demand side of the equation for gas in 2007?

Picchi Actually, during the past couple of years, we've seen gas consumption declining. The reason: due to recent high gas prices, a lot of industrial demand for that commodity has moved offshore. So while the gas-demand situation probably won't get much worse, I don't see it getting too much better, either. With high gas prices the new reality, it's not likely that industrial users will be going back to that commodity in a very big way. I would thus expect gas demand in 2007 to be flat relative to 2006.

Investor And for gas prices to trade in what range?

Picchi In a broad range of $5 to $15, with an average price for the year around $7.

Investor Do you expect to see more U.S. liquefied natural gas (LNG) imports, and what impact might that have on gas prices?

Picchi More LNG imports are inevitable because of the run-down in the domestic gas resource base, and also because we now have some pretty big sponsors of LNG projects in this country. Companies like Chevron, ConocoPhillips, ExxonMobil and Occidental Petroleum are all involved in the ownership of LNG terminals, or they've committed to using or paying rent for such terminals. So they'll be bringing a lot of LNG into the U.S. market.

Of course, if world gas prices are higher than U.S. gas prices, then LNG cargoes just won't come here. If that's not the case, then we should reasonably expect to see more LNG imports. Now, that wouldn't necessarily be a negative for the U.S. gas industry since those imports would tend to have a stabilizing effect on domestic gas prices-we would be less likely to see $15 gas in winter months. That, in turn, would be a very positive development for gas consumption.

Investor What's the biggest threat to the oil and gas industry in 2007?

Picchi I worry about political change more than anything else. The new Democratic-controlled Congress is going to be much more open to the idea of carbon taxes and forced energy conservation. However, this involves putting in place more of a tectonic, long-term shift in the demand structure for hydrocarbons. So I don't know whether any of those moves would have much bearing on oil and gas prices in 2007.

The single most important issue for investors right now is global warming and how hydrocarbon fuels are going to fit into a world where there is heightened sensitivity about the greenhouse-gas effects of burning fossil fuels. That sensitivity could translate into overall less demand, or a switching of demand from coal or oil to, say, natural gas.

Investor What about the possibility of the new Congress enacting a windfall-profits tax or removing tax incentives for drilling, particularly in the deepwater Gulf of Mexico?

Picchi I don't think that a windfall-profits tax is very likely. There are too many people in both the Senate and the House who have long memories about the last windfall-profits tax [in the 1970s], which was an administrative nightmare and ended up being a case in which the cure was far worse than the disease.

As far as removing incentives to drill, I think that's a much higher probability. It just seems to me that with oil prices around $60 and gas prices about $8, there are plenty of economic incentives already in place to drill for oil and gas without government incentives.

Investor Based on your macro outlook, which sectors of the oil and gas industry will likely benefit the most? The least?

Picchi With respect to the first question, I think all roads lead to natural gas. That's the group that will perform best, whether we have a positive or an adverse macro environment for energy. On the consumption side, gas is a less environmentally offensive, carbon-based fuel than any other hydrocarbon choice. Meanwhile, on the supply side, producers are already stretching right now just to be able to deliver the 18 Tcf or so annually that we've traditionally produced. So there's a very tight supply/demand balance.

Investor Therefore, gas producers and the oil-service companies that support them would stand to benefit most?

Picchi Yes, they would. Now with respect to your second question, coal would be very challenged under this macro-outlook, unless CO2 separation and burial-a technological process called sequestration-can be proven to be economically viable for coal-burning power plants.

Also, the refining sector may struggle a little bit in 2007 because of the competition from alternative fuels such as ethanol and biodiesel, if those fuels begin coming on in any great volumes.

Investor Do you see any similarities to this recent up-cycle for the oil and gas industry and the up-cycle that took place during the 1979-81 period?

Picchi There are similarities in terms of high commodity prices in both periods. But the causes for those high prices are entirely different. The 1979-81 price upturn was due to supply interruption caused by the Iranian revolution. Nothing like that has occurred in the past several years. Instead, this seems to be the first instance in modern economic history in which the price of oil has gone up because of a [high] demand imbalance versus a supply interruption.

This said, I don't know that the outcome is going to be that dissimilar. Ultimately, commodity prices will probably settle in a trading range lower than we saw for most of 2006. Very simply, when the price of a commodity rises high enough, you get more supply and less demand, and the pricing issue begins to cure itself.

Of course, the problem with forecasting commodity prices is that we always tend to extrapolate the present. However, one has to recognize that we're in a cyclical business where nothing remains constant. Yes, since 2004 we've entered a brave new world of commodity prices. Still, I wouldn't want to bet that oil prices couldn't collapse and retreat to $25 to $30 again. It's possible they could. But they probably wouldn't stay there very long.

Investor Do you think we've already hit the commodity-price peak in this current cycle?

Picchi I believe we've passed the peak, with oil prices having pulled back from $78 last summer. And I believe the big paradigm shift is within OPEC. It's no longer talking about raising production capacity to meet demand, but about allocating capacity among its members to support oil prices around $60.

So we're now seeing a shift in the expectation for the price of oil going forward. Put another way, we're in a different chapter of the same book.

Longer range, however, if the IEA is right that the demand for oil is going to be 116- or 117 million barrels per day by 2025 or 2030, then we're going to have a very hard time meeting that demand level. Frankly, I don't see where the supply is going to come from. So for the moment, we may be in a cyclical downturn for oil pricing, but I'm not sure how long that's going to last.

Investor Therefore, longer term, oil prices will tend to remain fairly robust?

Picchi That's correct, regardless of what happens cyclically in 2007 and 2008. If the IEA is right, the price of oil is going to have to remain high to encourage development of all the other energy-supply alternatives.

But as I've already suggested, it's almost impossible to forecast the price of a commodity like oil when there is so much creativity in the market-so many innovations that could take place in the energy space-that could bring crude prices down.

On the other hand, without the intervening influence of technology and changes in energy-consumption patterns, it would certainly appear-looking at the future supply/demand situation-that there's going to be much more upside pressure than downside pressure on oil prices.