Oil & Gas Prices Back on the Rise

05/25/2011 01:20 pm ET

The prices of oil and natural gas appear to have bottomed now. But with inventories near record levels, a quick price spike much higher doesn't seem sustainable in the short-term. Yesterday, the US Energy Information Administration (EIA) weekly petroleum report clearly showed that recessionary low demand continues to dominate any supply reductions.

For instance, overall petroleum use was only 18.2 million barrels per day (Mbd), down 7.9% from last year and the lowest since May of 1999. Last week, demand for gasoline was down 4.2% from 2008, distillates down 17.7%, and propane down a rapid 31.4%. This low demand has sent inventory levels of everything but gasoline close to records. Crude oil production remained ~.2 Mbd (3.7%) below its mid-April peak. But the beginning of output from the Gulf of Mexico's Tahiti platform started to flow this week, which may help 2009 average US crude production stay above 5 Mbd.

A Weaker Dollar and Stabilizing Economy

While the fundamentals of supply and demand remain largely bearish for now, speculators are sending oil prices up as high as $58 per barrel on the weaker dollar and signs the economy is regaining its footing. The dollar has weakened over 5% in recent weeks and the rate of job losses is decelerating. Some analysts are talking $70 oil in the weeks ahead, but that seems unlikely unless lower rig counts really pull oil production down quickly. But $70+ by year's end seems reasonable, as the global economy will hopefully gets its groove back. This would translate into gasoline prices ~$2.50 per gallon, so I encourage everyone to refocus on efficiency to lower costs (and be climate-friendly).

Natural Gas Rising Too

Natural gas prices have gone up 25% to $4 from their late April low ~$3.15 per MBtu. And the CEO of major natural gas producer Chesapeake, Aubrey McClendon, said prices are likely to rebound dramatically by late 2009. He expects the new normal for prices will emerge to be more than double today's price, at between $8 and $9 per MBtu to ensure the marginal cost of new supply is reached.

Again, there is no short-term worry as supply is 23% above the five-year average and demand remains low. But production should decrease on today's lower rig count by late summer.

Wind & Solar Relative Prices Improve

If natural gas and oil do indeed rise another 100+% and 20+%, respectively, then the relative price of wind and solar will improve dramatically. I will keep you updated as this develops.