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Energy 2005: Ripe for Action

Investors who made oil and gas stocks a part of their 2004 portfolios feel energized as the calendar turns to a new year. With oil prices piercing $50 and natural gas prices heating up as well, energy equities followed. Higher prices mean higher cash flow for exploration companies, which, in turn, means more drilling and more revenue for energy service companies.

However, the "threat" of milder weather and the possibilities of new supplies of crude coming from overseas have helped bring oil prices down from the stratosphere, back into the $40 range. While those prices, if sustainable, provide plenty of opportunity for energy investors into the new year, the rapid descent -- similar to the ascent just months earlier -- has spooked some energy pundits as the new year approaches.

For some, that means opportunity. For others, it suggests "lights out" for the energy rally into 2005. Both can't be right.

Supply and Demand

While spikes in energy prices can occur for a number of reasons, long-term price direction is almost always determined by supply and demand. Certainly, 2004 had its share of exogenous variables in the oil markets: instability in the Middle East, uncertainty in Venezuela, production issues in Saudi Arabia, strikes and strife in Nigeria, and challenges toward capitalism in Russia, just to name a few.

All of those issues contributed to the price acceleration in crude and created what many called an unsustainable "risk premium" in the price. While all of those variables certainly had an impact, so too did the impact of rising global demand for crude.

Whether it was the acceleration in development in China or India or the slow but steady improvement in the global economy, demand for all energy sources -- crude, natural gas and coal alike -- increased in 2004. While the debate will rage about what rate of growth China will post in 2005, the fact is that the burgeoning country will continue to use more, not less, energy. As a result, global demand is likely to continue to rise into the new year.
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