While S&P projects real U.S. GDP (gross domestic product) growth will slow to 2.3% in 2007 from 3.3% in 2006, the world economy looks solid. S&P Economics is calling for global GDP growth of 3.2% in 2007 vs. 3.8% in 2006, driven by growth in emerging countries, particularly China. This global economic growth is increasing the consumption of energy. As such, energy demand in developing countries is expected to account for 75% of the increase in energy usage over the next 25 years.
S&P Economics is forecasting a soft landing for the U.S. economy, and believes the Fed may lower interest rates by the second half of 2007. Given that a soft landing is most likely and a recession may not materialize – investors are likely to turn to sectors that do well early in an expansion. Thus, we believe that the energy sector may soon be on investors’ horizons.
While S&P expects that operating EPS growth for the S&P 500 energy sector will slow to 6% in 2007, from 26% in 2006, using data from S&P Index Services, we estimate that the energy sector is the most attractively valued sector within the S&P 500 with a P/E-to-growth ratio of about 0.7 vs. 1.2 for the S&P 500. We believe attractive valuations will continue to drive investor interest in the Energy Sector. S&P forecasts a year-end P/E of 9.3 for the energy sector in 2007 vs. 14.7 for the S&P 500.
S&P and Global Insight project global oil demand will increase about 1.8% in 2007, from 1.1% in 2006 – with demand from China the largest single source. While there are a large number of non-OPEC (Organization of Petroleum Exporting Countries) projects slated to come on stream through 2007, as well as sizeable light sweet OPEC projects, we estimate that worldwide demand for oil will exceed non-OPEC supply growth in 2007 by about 1.5 million barrels per day, once we factor in field declines and project delays. We thus believe that West Texas Intermediate (WTI) oil prices will average $64.44 per barrel in 2007 and $64.75 in 2008 vs. $66.04 per barrel in 2006.