Alongside Obama's approval ratings and the Democrats' chances of retaining Congress, what else is heading down these days? Expectations for U.S. economic growth? Check. Consumer confidence? Check. Hope for a better tomorrow? Check. You get the picture. Not exactly good news, is it? With this in mind, we are cutting our 2011 oil and natural gas price forecasts. On the oil side, we are reducing our 2011 forecast from $90/Bbl to $80/Bbl (compared to our current estimate of just over $75/Bbl in 2010) due to the above concerns over the broader economy. For the first time in years, we are now in-line with the futures strip (and slightly below the Wall Street consensus). We caution oil investors that oil prices are currently tracking closely with the highly volatile broader stock market indexes, so our confidence in the near-term outlook is very low and oil prices could easily swing $20 either way before year-end. That said, $80/Bbl oil in 2011 is hardly the end of the world, and could prove conservative if the current administration redirects some of its attention from American businesses to Iranian nuclear facilities. Even though the next year is highly uncertain, we are still bullish on the longer-term oil fundamentals and are modeling longer-term oil prices rising to $95/Bbl.
While the 2011 oil picture still looks relatively healthy (as virtually all projects are economical at $80/Bbl), the U.S. natural gas picture remains unrelentingly ugly. Prices have been range-bound between $3.75/Mcf and $5.00/Mcf for the past six months. Moreover, the key supply/demand fundamentals in 2011 - core supply, industrial demand, and electrical demand - look even worse today than they did six months ago. If our forecast is correct, $5.00/Mcf natural gas may soon seem like the good old days. So here's some change you can believe in: We are cutting our 2011 gas price forecast from $4.75/Mcf to $4.25/Mcf - below our expected 2010 average of ~$4.50/Mcf. Similarly, our long-term-gas forecast will be reduced from $6.00/Mcf to $5.50/Mcf.