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COPYRIGHT 2005 Hart Publications, Inc.
Oil and Gas Investor: What's your outlook for the fundamentals and commodity-price direction of the oil and gas industry through the balance of 2005?
Deacon: The major theme we see playing is that OPEC's spare capacity is going to fall below 1 million barrels a day by the end of the fourth quarter, so prices are going to continue to move up in the near term-given that we see increased demand growth of about 1.9- to 2 million barrels a day this year and something fairly similar next year. So OPEC spare capacity combined with strong demand growth, mainly driven by the U.S. and China, is going to keep markets tight.
The basis we're using for valuation on the stocks is that $42-oil is going to provide the long-term floor for oil. The global finding and development costs for oil have moved up about 50% in the last three years, and so $42-oil is the Nymex price we believe producers need to justify new investments and earn a 10% rate on return. We don't think that the stocks are yet discounting that.
Going into 2006, the futures market says they will be above $60 per barrel, but we're assuming oil is $50 next year.
OGI: What's the greatest challenge for companies in the sector right now?...
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