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Demand for petroleum and natural gas is increasing in 1996, and oil and gas prices are rising or remaining firm. Production is also increasing in 1996, and several producers are planning higher output in 1997, as well. The oil and gas industry is timely for 1996, but earnings may swing from financial leverage and overseas political uncertainty. These stocks have prospects to outperform the market and are recommended for risk-tolerant investors.

The supply of natural gas for Jun 1996 is below its seasonal level, and is at 1.1 trillion cubic feet according to the American Gas Assn. The natural gas spot price is being kept high with strong demand and depleted reserves, and for the next three to five years consumption is expected to rise from 2% to 3% per year. Despite volatile gas prices several gas industry stocks are above average in timeliness and have good earnings prospects for 1996.

The severe winter of 1995-1996 created high demand for natural gas from residential and industrial users, especially in the Northeast, and record low levels of gas storage. Increased gas prices and new drilling techniques are making exploration and production more economically feasible, and the industry is also becoming more competitive through deregulation. There are investment-grade stocks here, although the industry is not timely.

Higher natural gas prices, along with steady prices for crude oil, have increased earnings and margins for the petroleum industry. Lower supplies and greater seasonal demand will maintain gas prices through 1996. A 10% internal productivity gain and increased reserves are important factors for companies, many of which are highly leveraged with debt. These stocks are not timely for 1996, and investments must be carefully chosen.

Natural gas is not a timely industry for the 4th qtr of 1995, but severe winter conditions in 1995-1996 could lead to a lower supply of gas and higher prices. Natural gas prices are $3 per thousand cubic feet in late 1995 and are not likely to fall. Higher gas prices will also benefit the exploration and production sector. Although this industry is not timely, several stocks have investment potential for 1996.