"Prices back above $100 a barrel for crude oil are quite likely in 2009, and a return to this year’s high is possible," suggests Peter Way, who monitors the buying and selling activity of "million dollar market makers."
In his always-fascinating Block Traders' Oil & Gas Monitor, he explains, "At a $100 billion scale, bets are being made that crude's price path to come is up." Here, he reviews the forecasts being made by "big block traders" as well as the specific stocks attracting their interest.
"Why are the big players in crude, energy industry and investment participants alike, so optimistic about its price in coming months? Don’t they know that there’s a worldwide credit freeze on?
"Don’t they see the plunge in auto sales with GM and Ford, hats in hand, begging in the beltway? Don’t they hear about China’s post-Olympics slowdown?
"Don’t they know about the glut of tanker transport capacity? Don’t they know that OPEC members always cheat on announced production cutbacks? Can’t they read the inventory statistics?
"Could it be that they think the credit freeze may thaw? Could they believe that drivers in the US will go back to pre-$4 a gallon driving habits?
"Could they believe that it’s always safer to bet on shortage than on oversupply? We don’t know. But the bets are being made, at a $100-billion scale, that crude’s price path to come is up.
"Are these folks such great forecasters that they should be believed? Well, they saw the decline in crude prices coming, and bet on it. In July, we showed that their forecasts out to December ’08 was down, from $145 to $95. Subsequent forecasts have been down to $65.
"As to individual stocks, our analysis looks for those that are capable of attaining our hurdle rate of +5% in probability-weighted net price change over the next 3 months (a +22% annual rate).
"Two that meet this criteria are Canadian Natural Resources (NYSE: CNQ), a Canadian oil sands producer, and Petrobras (NYSE: PBR), the Brazilian National oil company that has recently been making major additions to its reserves through exploration and discoveries.
"Meanwhile, several independent oil exploration & development companies are viewed as having large upside prospects, although with sizable downside exposures a part of the picture.
"That may stem from the recognition that their ultimate role in the world’s energy future is likely to be, by acquisition, as an addition to the production reserves of one of the major integrated firms.
"While crude prices and the stocks’ prices have gone down, they still own the resources in the ground that will likely be extracted at higher prices in the future. Or be acquired in anticipation of that.
"The calibration of past stock price behavior with forecast dimensions is particularly helpful here. One such stock, Southwestern Energy (NYSE: SWN), handily beats our investment hurdle rate.
"Another E&P company that meets our investment constraints is Concho Resources (NYSE: CXO). It currently ranks better, on a reward-to-risk basis, than 95% of the 2300 stocks we review daily."
