Global oil prices, last week about $US96 ($NZ115) per barrel in the US and $US113 in the United Kingdom, are forecast long term to hold at about $US125 within five years in the United Kingdom.
New Zealand's electricity generators are expected to raise prices "dramatically" during the next four to seven years as demand prompts the need for "new-build" electricity generation.
Craigs broker Peter McIntyre said at present competition within the electricity sector was "intense", with larger price differences between the competing "gentailers" (generators/retailers) highlighted by the growing number of consumers choosing to switch retailers.
Following three years of above average rainfall, there was now an overcapacity of electricity, he said. He expected this "rebalancing" to continue for the next year, and pricing would remain "extremely competitive" for consumers for up to the next three years.
However, as demand grows at a projected 1.5% per annum, generation assets would be decommissioned, grids upgraded, regulatory changes and the likelihood of a return to more normal weather patterns.
The retail price would need to rise to meet the required new build price.
"This means that somewhere during the next five years, retail pricing needs to begin rising materially, or the lights are likely to go out," Mr McIntyre said.
Because of the electricity pricing competition, Craigs has reduced the short-term earnings prospects on Contact Energy and TrustPower, and downgraded share price targets from $7.33 at present for Contact to $6.63, while TrustPower's target declines from $8.12 to $7.89.
While conditions for the companies in the short-term are negative, Mr McIntyre said the likelihood of increasing prices made Contact and Trustpower "highly attractive", maintaining a "buy" recommendation on the former and "hold" on the latter's shares.
Mr McIntyre said the volatility and rise in recent oil prices had been led by the weakened US dollar, improving US factory orders during May, and following reports on employment growth in China.
While Craigs had "trimmed" its oil forecasts for the second half of 2011, because of weaker than expected economic growth and the recent, surprise, release of US petroleum reserves in lieu of lack of Libyan production, prices from Brent crude out of the UK were expected to remain "strong" over the medium to long term.
