Believe it or not, OPEC isn't all that comfortable with $60 or $65 oil. That's the appraisal of Fadel Gheit, New York-based senior vice president and energy analyst for Oppenheimer & Co. Gheit met informally twice this fall in Geneva with Adnan Shehab Eldin, OPEC acting secretary general and head of economic analysis. There's concern by the cartel that, after three damaging hurricanes, there could be a slowing of U.S. economic growth that could domino into a slow-down in global economic growth. That, in turn, could dampen global oil demand-and sustained high crude prices could curtail demand even further. "Given this apprehension, the new unofficial oil-price target that OPEC has in mind is closer to $45," Gheit says. He would be surprised, however, if oil prices next year strayed out of the $50 to $70 range. "The U.S. economy is good and demand is likely to continue growing, perhaps 1.5% to 2% in 2006, plus there's an adequate supply of crude even though we're facing the lowest spare productive capacity in history." The analyst contends that up until recently, the global economy has been getting a free pass when it comes to the real price of oil, but now crude prices are catching up with inflation. In his view, there's no reason oil prices should drop from their recent levels because companies can no longer replace production at $5 to $10 per barrel. "Today, the replacement cost of a barrel of oil in the ground is around $11 to $12, and that's a bargain because we're beginning to see M&A transactions where companies are willing to pay $15 to $20 per barrel for reserves." He cites the true all-in finding and development (F&D) costs associated with Pogo Producing's recent acquisition of Unocal's Canadian assets, Chevron's purchase of Unocal, and Norsk Hydro's purchase of Spinnaker Exploration. Given such a robust oil-price outlook, the analyst sees good stock-buying opportunities within the energy space, particularly the refining sector. He notes that while margins for refiners such as Frontier, Tesoro and Valero have historically averaged $5, they've jumped to $10 in the past two years, and to $15 in 2005-with a spike to $35 after hurricane Katrina. "Recent margins are unlikely to come down sharply any time soon because we still have refining capacity constraints and are looking to increased product demand going into the winter season," explains Gheit. "As a result, all refining stocks should witness double-digit returns in the next 12 months, with Valero poised to benefit tremendously from its acquisition of Premcor." In the E&P sector, he favors gas producers because their market valuations are reflecting gas prices of only $7 per thousand cubic feet. "During the next year, natural gas will probably lead oil, in terms of valuation and the resulting performance of gas stocks." In particular, the shares of Burlington Resources, Devon Energy and Anadarko Petroleum are attractive. "The cheapest of these is Anadarko, whose shares trade at 7.5 times forward 2006 earnings versus a group multiple of 10," says Gheit. He also likes financially flexible Burlington Resources, which has more than $3 billion in cash on its balance sheet and an ongoing stock-buyback program. "The only thing I don't like about it is its hedging strategy. This major producer doesn't need to hedge unless it's protecting against a collapse in gas prices, which I don't see happening any time soon." As for Devon, in recent years investors have been telling management to slow down in terms of acquisitions, Gheit says. "But this turned out to be a brilliant strategy because Devon bought assets in the ground for just a fraction of the value of what those assets are now worth." Among major integrateds, the most undervalued company is Chevron, he adds. The stock trades at about 7.5 times 2006 earnings, slightly below its peer group, but more importantly, in terms of the implied reserve value of the company-what the market is paying for Chevron's proved reserves-the stock is trading at only $11 per barrel, about a 17% discount to the average for its peer group.