Energy Prospectus

First let's review why oil prices fell this week:
> We killed Bin Laden and there were no immediate terror attacks. Thank God!
> U.S. dollar strengthened against other world currencies (probably as a response to getting Bin Laden)
> Reports show Americans cutting back on driving as a result of higher gasoline prices
> Large build in the U.S. oil inventories reported on Wednesday
> Large and unexpected jump in the first-time claims for unemployment benefits (more support for lower oil demand)

So what happens now?

A. A couple days do not make a trend. I believe oil prices will level off in the $95/$105 per barrel range.
B. The bottleneck at Cushing, OK is still there and other crudes will continue to trade at a large premium, Gulf Coast oil is still trading at a ~$15/bbl premium to WTI (see my forecast for Gulfport (GPOR)).
C. All of the long-term trends that took oil, food and metals higher are still in place. China and India did not stop growing this week.
D. 1.4 million bbls per day of high quality oil coming out of Libya is still off the market and OPEC cannot replace it.
E. Still lots of unrest in the Middle East and North Africa
F. Probably the most important. Does anyone out there actually think the U.S. dollar will get stronger as this nation continues to spend its way into bankruptcy? Once the killing of Bin Laden moves off the front page, we will be reminded that we are racing toward the national debt ceiling and the collection of idiots running this country don't have any idea how to stop spending money we don't have. Our national debt will be pushing $15 Trillion by the end of this year and we will be well into QE3 or QE4.

Our Sweet 16 Growth Portfolio did not run up 25% with oil prices. It has actually been rather flat the last two months with investors worried about world events and waiting on the sidelines to see first quarter results. Back on January 1st none of these companies required $100/bbl oil to have a good year. All of the Sweet 16 companies are in better shape today than they were four months ago, thanks to a surge in cash flows they were not expecting. Take a hard look at the forecast models for BEXP, DNR, CLR, GPOR and PXP that I updated this week. They are all on track for strong growth this year and they don't require $130/bbl oil to get there.

If oil levels off in the $95 to $105 range the E&P companies will have a great year and the economy will continue to recover.

The global trends that led to the rise in prices for food, energy, metals have not gone away.

LONDON (Reuters) - Goldman Sachs, which in April predicted this week's major correction in oil prices, said on Friday that oil could surpass its recent highs by 2012 as global oil supplies continue to tighten.

The Wall Street bank, seen as one of the most influential in commodities business, said it did not rule out a further limited short-term fall in oil prices if macro-economic data, which it said had sparked this week's crash, continued to disappoint.

News of Goldman's mid-term outlook on Friday prompted a $1 a barrel jump in oil prices, helping oil to pare some of its earlier heavy losses.

Oil prices seesawed on Friday, turning positive on better than expected U.S. jobs data, which eased fears about global economic recovery that led to a 10-percent price crash on Thursday.

"It is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year," Goldman Sachs' analysts said in a research note.

"We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market," it said.

It said it believed that this week's correction in oil prices, which fell from above $125 per barrel of Brent crude to below $106 on Friday, was sparked by disappointing economic data releases and U.S. oil inventory data.

"The sell-off yesterday (May 5) has likely removed a large portion of the risk premium that we believe has been embedded in oil prices, which could suggest further downside may be limited from here."

"However, we remain wary of potential further downside should economic data releases in coming days continue to disappoint, with the focus now turning to today's (May 6) non-farm payroll report in the United States."

These comments are from Morgan Stanley on May 9th "Commodities Strategy" report.

We cannot attribute last week’s price declines to
fundamentals, which for many commodities,
particularly oil and corn, are still constructive. To be
clear, prices could fall, initially even on favorable data,
as price gains could be met with additional selling.
Evidence of this was clear on Friday as the market
initially found support on a better-than-expected US
non-farm payrolls report in the US.
A still positive macro growth environment leads us
to believe that the declines exhibited last week
provide a good entry point for both investors and
consumers. We continue to prefer corn, crude oil, gold,
aluminum, copper and nickel to natural gas, zinc, the
meats and the softs.
Performance