For any producer, $30 oil and $4.50 gas is music to the ears. But for a lot of investors, it has meant caution. "Many institutional investors believe that the price of both commodities has been too high of late," says William H. Walker, president of Howard, Weil, Labouisse, Friedrichs Inc., New Orleans. "What they'd rather see is commodity prices come off a bit and use that as an opportunity to buy energy stocks." Walker believes that's exactly what the buyside will see during the next six months, as West Texas Intermediate crude prices retreat to the mid-$20s and natural gas prices ease below $4. "If Saudi Arabia can't jawbone oil prices down, it'll likely increase production, plus the recent high WTI prices we've seen will definitely have a dampening effect on demand. This, of course, is a formula for lower market prices," he says. "On the gas side, $4-plus prices are going to create an awful lot of drilling in North America, and the resulting higher supply will similarly push gas prices down." As oil and gas prices pull back, the equity markets should begin to come back this fall. Explains Walker, "It'll be easier to sell energy stocks with oil at $25 and gas at $3.50 than selling the same stocks when oil is $30 and gas is $4.50. There will no longer be the issue in investors' minds about the sustainability of high commodity prices. And in the case of gas, the market by that time will have a better idea about demand, storage levels, weather and pricing going into the 2000-01 winter heating season." As investor interest in the upstream warms up, Walker hopes the buyside will exercise discipline as it decides which producer stocks to favor. "During the last 20 years, energy as a percentage of the S&P has dropped from 26% to 6%, which means a lot of capital was wasted, particularly in the E&P sector." -Brian A. Toal