EIA Sees Chance of $3.00 Gasoline.. Win-Lose For Many (VLO, PBR, BHI, OIH)

The Energy Information Administration is out with its newest 2010 and 2011 predictions for both supply and demand for oil and energy products.  This may throw water on T. Boone Pickens’ call for $90 oil this year, but what stands out perhaps more than anything is that  demand for oil is actually expected to be up for the first time over 2 years.  While this might not yield much for oil traders today, this forecast is something that the refineries will be paying close attention to as they have to figure out some how some way to boost their margins.

Today’s news is probably not going to move shares of Valero Energy Corp. (NYSE: VLO), but there is some data at the end that looks pretty solid for Petroleo Brasileiro (NYSE: PBR), or Petrobras, for some continued production growth.  The data offers some continued support for a belief that the Baker Hughes Inc. (NYSE: BHI) rig counts won’t suddenly head south, and that in turn may offer some stability for the Oil Services HOLDRs (NYSE: OIH).

With the WTI crude spot price increase from $69.48 per barrel on December 14 to $83.12 on January 6 and then back to $72.85 on January 29, the EIA expects the price of crude oil to rise again in the spring to an average of about $81.00 per barrel over the second half of this year and $84 per barrel in 2011.  It sees an average of $76 per barrel in February and March, before rising to about $82 per barrel in the late spring and to $85 by late next year.  It is interesting that despite the sustained lower price, this is unchanged from a month ago.

One assumption in the data is that U.S. Real GDP will rise 2.3% in 2010, and it is also assumed that U.S. Real GDP will rise 2.5% in 2011.  In short, the EIA is NOT looking for any double-dip recession.  Its assumptions for global growth are oil-consumption-weighted real GDP growth of 2.7% in 2010 and 3.6% in 2011.

The EIA also sees the annual average regular-grade retail gasoline price going up from $2.35/gallon last year to $2.84 in 2010 and then up to $2.97 in 2011.  What is budgeted is that gas prices at the gas pump may go over $3.00 per gallon during times getting closer to this spring and summer.  Our big issue with these calls from government agencies and large macroeconomic forecasting groups is that they almost never subscribe to anything other than the efficient market theory.  They believe that today’s prices are reflective of all scenarios, and much of the forecast data is reliant upon older data.  Had oil stayed closer to $80/barrel, it seems rather safe to assume that the assumptions might have a higher equilibrium.

As for the demand increase… the EIA revised its outlook for global liquid fuels consumption to grow by 1.2 million bbl/d in 2010 and 1.6 million bbl/d in 2011 after showing annual declines in 2008 and 2009…. non-OECD countries are the factor.   The figure is actually marginally lower than the expected demand increase seen a month ago.  The refineries need to play off of demand, Valero in particular… If they cannot pass on higher costs when demand increases and when prices rise, then they are going to have another dismal couple of years.

Non-OPEC supply rose 560,000 barrels per day in 2009 and is projected to increase by 430,000 barrels per day in 2010.  Guess where the largest growth pockets are?… the United States, then Brazil and Azerbaijan.  Petrobras must like this.

We have left off some of the diesel data, but also the Nat-Gas and electricity markets to keep this focused.  Unfortunately for the natural gas market, production is expected to down by 2.6% in 2010.

JON C. OGG
FEBRUARY 10, 2010