THE HIGHTOWER REPORT
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800-662-9346(December 29, 1999) ENERGY COMPLEX: Over the past two months we had largely expected the energy complex to get far ahead of itself in terms of pricing. With the recent API stocks decline and OPEC posturing for an extension of production cuts, we remain in the bull camp but continue to expect a top, albeit from a new contract high level. In a year in which energy prices (crude oil) doubled, it is understandable to be concerned about a major top but under short term conditions it would not seem like the bulls are going to lose control of the market. Not only are API crude oil stocks in the U.S. tight, but the IEA claims that the world supply of crude recently fell to 80 days. The IEA suggests that a world supply below 70 days could result in severe repercussions. OPEC suggests they will not allow severe consequences from the prices, but at present they suggest the market is not yet into those severe circumstances. Recently, the U.S. Energy Secretary threatened to do "something" if prices maintained dangerous levels and we take that to mean a possible sale from the strategic reserve. In response to the U.S. Department of Energy threat the Venezuelan Oil Minister suggested that he doesn't see prices rising significantly above current levels. Furthermore, there has been a propensity for the heating degree use in the U.S. to run below normal, but that seems to have changed late last week. It would be our opinion that the energy complex is poised for a showdown with stocks tightening, demand growing, and OPEC looking to extend the production cuts. It would seem that a strong upward price thrust stands in the offing unless above average temps are seen, the DOE dumps stocks or OPEC relents in the extension of the cuts. An interesting phenomenon of the current energy market is that natural gas and crude oil are basically distinct markets trading in opposite directions. In fact, a Wall Street Journal front page article on December 15th highlighted a possible switch over by manufacturing concerns from using crude oil to natural gas which would explain the surprising tightening of natural gas stocks during the warmer than normal early winter. Given the current setup, natural gas would seem to be cheap relative to crude oil, but in a longer-term standing might be consider almost in the middle of the last three year's "normal" price range. Therefore, natural gas still stands a chance of a strong run, but probably can't make the move without clear cut fundamental help. Clear cut fundamental help means normal or below normal temps, continued U.S. economic growth and a couple straight weeks of weekly AGA stock drawdowns in a row. In the last two years the natural gas market made and completed its winter run prior to mid-November which means that the current year is already behaving differently than prior years. If one were to make a basic year over year comparison in prices, we are under last year's stocks with current stocks at 2.932 bcf compared to 3.014 bcf. Therefore, with the assumption of consistent year over year growth in demand and the greater U.S. growth rate, it is logical to assume the bulls will try to run natural gas higher if the weather cooperates. However, it would seem like the major sustained upside potential widely expected earlier this year has been reduced due to low early demand.
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