GE Asset Management's Nick Koutsoftas is a commodities portfolio manager and a sector fund manager focusing on U.S. energy equities. He has been with GE Asset Management for 10 years, and has led the firm's commodities team since 2006. Before joining GE Asset Management, Koutsoftas held positions at GE Plastics and GE Power Systems.

Recently, IndexUniverse's Associate Editor Lara Crigger sat down with Koutsoftas to discuss his outlook for energy in 2010, including why he thinks oil will stay at $70-75 next year, where copper goes next and why he thinks that when it comes to regulation, cooler heads will prevail.

IU.com: Where do you see oil heading in 2010?

Koutsoftas: I have oil in a $70-75 range in 2010, with it moving up to $80-85 in 2011.

IU.com: That's pretty conservative, compared with the $100-plus oil some analysts have predicted.

Koutsoftas: Yes, it's conservative, but we try to base things on the fundamentals of supply and demand, and inventory analysis. When you look at oil specifically, there are still some head winds, especially if you look at inventories of distillates, where we're still above a five-year average. We haven't had a significant pickup in gasoline demand, which is a primary driver of overall crude demand (especially in the U.S.). So between high inventories and this lack of near-term demand, I think $70-75 is actually a pretty good number, especially if you look at where crude came from.

IU.com: But what about the longer-term picture?

Koutsoftas: You still see some supply constraints. If you look at what it takes to get a new barrel of oil out of the ground, given depth and geology, you're probably looking at a marginal cost of $65-70. And I like to use marginal cost as a "fair value." But if you look beyond that, to where this new oil is coming from, I think you have to add in the geopolitical risk premium on a barrel of oil. Where is this new oil coming from? Right now, it's primarily Brazil, West Coast of Africa, Iraq—these aren't easy places politically to do business.

I am structurally bullish on oil longer term, but consider how much we've spent in [capital expenditures], even just over the past five years. The world has spent billions of dollars in capex, and we've only been able to grow production 2 percent. Non-OPEC supply actually went down 5.5 percent, despite record prices. So when you consider that, I think that's a true testament to just how difficult it is to pull oil out of the ground.

Add on top of that supply constraints, increasing decline rates and a recovery in OECD demand, and I think you do have a secular bull market in energy.

IU.com: Is it still reasonable to approach oil from a supply/demand perspective? For example, earlier in the month at the "Inside Commodities" conference, our keynote speaker Dr. Nouriel Roubini said that oil specifically was a market no longer driven by fundamentals.

Koutsoftas: That's a good point, and I somewhat agree with him. Just to reiterate what he said: You can borrow at almost 0 percent interest rates; you can short the U.S. dollar and basically buy anything else: oil, other currencies, and so on. But if there's any sense that the U.S. dollar would strengthen based on a higher GDP, and a hint of higher interest rates, it would cause a near-term correction in commodities, especially in oil and gold, given their correlation to the U.S. dollar. That's where the bubble comes into play, this core of people using commodities—especially oil and gold—as a hedge against a weaker dollar.

Longer term, I am somewhat bearish on the dollar, so I do have a near-term concern over the next two to six months. If the dollar strengthens, we could see oil go back down to $60. So if you have crude trading around $80 today, that's a pretty significant correction! But it could happen. Commodities have been, and I think will continue to be, very volatile, because of these nonfundamental drivers.

IU.com: Were you surprised by the recovery we've seen in oil prices this year?

Koutsoftas: When I thought about going into 2009, I was actually thinking about a $58 price for oil for 2009. We might be averaging a little more than that right now. I didn't expect the run-up to the $80 level until really next year. I think the right price is still $70-75, which is the fundamental view.

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