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Demand By China, Terrorism Driving High Oil Prices"
BOSTON -- Energy executives believe the rising price of oil is not the result of the war in Iraq, but rather has a surprising cause -- increasing demand for energy in China, according to a poll of gas executive and institutional investors at a conference here by RBC Capital Markets.Nearly half of executives polled believed that China's need for energy was the primary cause of rising oil prices. That issue was also cited as the biggest issue facing the energy industry."Chinese demand is going to keep energy prices high for the foreseeable future," said Kurt Hallead, energy analyst at RBC Capital Markets. "But I think the results of the poll show that attendees are feeling that this issue and the resulting high energy prices will not kill the global economy. The increasing energy demand around the world is providing the potential for more predictable growth which should translate into premium valuations for energy companies."Respondents believe that prices have peaked, but will remain high. They predicted that the average price for gas at the pump would remain at the level it is today, and a barrel of oil will be worth $35.80 by year's end -- down slightly from its current high."If oil and natural gas prices were to remain at levels suggested by the survey, it would only have a nominal impact on economic growth," said Hallead.Terrorism remains a major issue for the industry. That was demonstrated by the response to a question about oil supplies, where 55% believe that an attack leading to a serious disruption in oil supplies was inevitable or likely this year. "Terrorism is a major issue," Hallead said. "It's fair to assume a security premium for oil will persist indefinitely. The only question now is its relative magnitude. At this point, the premium appears to be about $8 to $12 a barrel."Respondents picked exploration and production companies and oil services companies as the sectors that hold the greatest investment opportunity over the next year. They chose Russia as the region with the greatest incremental opportunity for oil production followed by West Africa, the Middle East and Libya. But executives were doubtful about Iraq as a major business opportunity over the next few years. In fact, almost 80% predicted that it would be 2006 or later before that country would be safe enough to produce oil in significant amounts.On the election, it wasn't even close. George Bush, who four years ago edged out Al Gore by a 53% to 47 % split in the same Energy Conference Poll, was predicted by 75% to win the 2004 presidential race. Nearly 90% believe a Bush administration would be better for the energy sector than a Kerry presidency.Executives said that natural gas prices also will trend higher and remain above their historical levels. On average, they felt that natural gas would hit $6.20 per million cubic feet at the end of this year, and $6.10 at the end of 2005.Respondents were bullish on the outlook for oil service stocks, consistent with RBC Capital Markets' outlook on the sector. They predicted, on average, that the Oil Service Index would end 2004 at 106.2 and finish 2005 at 115.6, a nearly 20-% increase.One year ago respondents identified natural gas as the biggest issue facing the energy sector, and it remains an important piece of the world's energy puzzle. "Refining capacity is still coming on line," Hallead said. "LNG will continue to be an increasing source of supply volume with a more meaningful impact in 2007 and beyond."RBC Capital Markets is the corporate and investment banking arm of RBC Financial Group, the global brand name of Royal Bank of Canada, Toronto. RBC is a diversified financial services company in North America with over 60,000 employees and 12 million clients through offices in some 30 countries.Visit RBC Capital Markets: www.rbccm.com"