While the market is busy chasing high-flying, but volatile, high-tech and Internet issues, two oil and gas analysts paint an oil-and-gas-pricing outlook that may cause many investors to take a second look at energy stocks. "We are optimistic about near-term natural gas prices due to the favorable fundamentals of North American gas, including the outlook for increased gas-fired electricity generation, improving industrial demand and the continued supply-side treadmill," says David Pursell, vice president of upstream research for Simmons & Co. International in Houston. The analyst believes that U.S. daily gas production this year of 50.2 billion cubic feet will be flat with 1999 levels-assuming the gas-directed rig count stays around 625-and that Canadian gas imports will increase by 400 million cubic feet per day, to 9.4 Bcf. Meanwhile, he sees daily U.S. gas consumption this year rising by 1.4%, to 60.2 Bcf, driven primarily by electricity-generation and industrial demand. For next year, he predicts a widening of this supply-demand gap. With these forecasts in mind, Pursell expects an average 2000 Nymex gas price of $2.50 per Mcf, increasing to $2.60 next year. Even more bullish is the analyst's near-term outlook for oil prices. "We see West Texas Intermediate crude prices averaging $25 per barrel in 2000 and $22.50 next year." The rationale for this outlook? "We believe that OPEC's excess productive capacity is on the order of 3- to 4 million barrels per day, not the consensus estimate of 7- to 8 million barrels per day," says Pursell. "If one assumes that OPEC will bring on an additional 2.5 million barrels per day of production by the end of the year-as we do-that's the majority of its excess productive capacity. In such an environment, where there's not much cushion on the supply side, we're likely to see crude prices around the mid-$20s rather than $18." Adam Sieminski, director and energy strategist for Deutsche Banc Alex. Brown in Baltimore, closely mirrors Pursell's bullish oil-price predictions. "OPEC's conservative production [increase] plans, robust demand growth, and limited non-OPEC supply response for 2000 should keep [crude] inventories at unusually low levels," he says. "Accordingly, we are dramatically raising our 2000 WTI price forecast to an average of nearly $25 per barrel, up from $21, and are increasing our 2001 crude-price estimate to an average of $20.50, up from $19.50." The analyst readily concedes that oil prices this year are going to decline, "but not as quickly nor as low as the pessimists believed." Says Sieminski, "Long-term growth rates might still favor other sectors [of the stock market], but we believe that the short-term valuation gap between oil-share prices and market indices will make the oil sector look attractive to investors." He stresses that the window of oil-sector underperformance, as oil prices decline, will be very short-lived. -Brian A. Toal
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