Analyst: Rebounding economy signals higher oil, gas prices

The economy is starting to rebound, and that is good news for oil and gas prices and domestic and international rig counts, says Douglas Becker, managing director oil services & equipment for SMH Capital, an institutional equity research group. “Economic recovery does seem to be around the corner, starting in the fourth quarter, and oil and gas prices should start to go higher,” Mr Becker said in speech at the 2009 IADC Well Control Conference of the Americas & Exhibition in Denver on 25 August. In terms of the rig count, “less bad is good,” he said, noting that the US rig count bottomed out in June and is declining at a slower rate.

“Economic growth drives crude oil demand, and that drives oil services spending,” Mr Becker noted. The International Monetary Fund is anticipating a 1.4% contraction in economic growth for 2009, but a 2.5% growth for 2010 and more than 4% for 2011. Meanwhile, the International Energy Agency is forecasting 2010 oil demand growth of 1.7%.

Oil prices, Mr Becker predicts, will go over $75/bbl in 2010 and reach $80/bbl in 2011. Economic growth, limited non-OPEC production growth and overstated OPEC capacity will drive this increase, along with a falling US dollar. “Because oil denominations are in US dollars, international demand goes up as the dollar goes down, which drives up prices,” he explained.

US natural gas storage will reach a new record-high at the end of the
injection season this year, predicted Douglas Becker of SMH Capital.

The gas side of the industry continues to be impacted by high supply. “There is way too much gas,” Mr Becker said, noting that storage will reach a new record high at the end of the injection season this year. “The shale plays are incredibly prolific and LNG imports are up while demand is down,” he said. “Things can’t get much worse.”

But natural gas prices track the year-over-year storage differential, which are expected to improve with the start of the withdrawal season. “The dramatically lower rig count, down 60%, and improving demand in 2010 mean natural gas prices should improve in 2010,” Mr Becker said. NYMEX futures are anticipating $5.80/MMBtu in 2010 and $6.70/MMBtu in 2011.

The economic trends signal more spending on oil services and equipment, which is related to oil demand, said Mr Becker. He is forecasting a 5% increase in spending for 2010 and a 10% increase in 2011.

Other indicators include raw permit data, which is trending higher but is still quite volatile, Mr Becker noted. The US rig count should increase by an average of five to 10 rigs for each of the next eight weeks, two-thirds of them for oil. The international rig count is expected to bottom in January 2010, to around 900 rigs, he said.

However, jackup dayrates will head lower as new rigs continue to come on line faster than demand, Mr Becker said. “National oil companies do not respond quickly to higher prices and LNG demand is declining,” he pointed out.

Finally, the deepwater arena looks “unsinkable,” at least through 2011, Mr Becker said. “With limited availability, deepwater contracts will likely be at attractive economics over the next several years, assuming oil stays over $60 per barrel.”