Australia | Jul 20 2007
By Greg Peel
It’s hard to believe that only three years ago Deutsche Bank’s head office analysts were forecasting a 2010 oil price of US$24/bbl. With West Texas Intermediate now making its second run through US$75/bbl in the space of a year, sub-$30 prices seem but a distant memory.
At that point Deutsche made the bold move of raising the 2010 (or mid-cycle) price to US$27/bbl. It was also about that time that the concept of a “super-cycle” started to be formulated. Analysts – at least some of them – were beginning to think this China thing had legs.
And so it seemed to be. Deutsche again raised its price to US$32/bbl in February 2005, in July to US$35/bbl, and in September to US$40/bbl. It sat there until June last year when geopolitical tensions made US$45/bbl more prudent.
A year on, it’s a case of let’s just stop beating around the bush. There is very little to suggest oil prices are going to head back to US$40/bbl anytime soon unless there’s some extraordinary slowdown in economic growth or miracle advancements in energy technology. Deutsche had once assumed symmetrical risk around its long term price (ie there was just as much chance of the analysts being wrong to the downside as to the upside), but in recent times the analysts have warned of a risk skew to the upside. Now they might as well put their money where there mouths are. Today Deutsche lifted its 2010 oil price forecast right up to US$60/bbl.
There – it’s done.
In so doing, Deutsche acknowledges that it is now ahead of the consensus pack at US$52/bbl. (UBS moved to US$60/bbl earlier this month). While all this concern over a distant oil price forecast might seem a bit like too much crystal ball gazing, the reality is the price chosen has substantial consequences. Distant plug-ins have proportionately very large impacts on the equations they’re plugged into – in this case energy stock valuations. By raising the oil price by 15% in New York, Deutsche’s Australian analysts are forced to rejig their models for the local sector. And that has resulted in some very major target price movements.
One of the biggest movers is AED Oil (AED) which sees a 32% target price increase from $6.30 to $8.30 (although this did include an increased production forecast as well). Given the share price is pushing $8.00 as we speak, one might be forgiven for wondering whether Deutsche’s local analysts had been sweating on this head office price change for a while. At least they had a Buy rating.
The same can be said for Nexus Energy (NXS). The shares are trading around $1.70 and Deutsche had a $1.40 target and a Buy rating. But as a result of the oil price upgrade (and positive developments at Crux) the analysts have jumped the target up 34% to $1.90.
But it’s refiner Caltex (CTX) that gets the big award. With a higher oil price, and a higher Singapore refinery margin assumption, Caltex gets a 31% target jump from $22.90 to $30.10 and an upgrade from Hold to Buy. As the shares are only trading around $24.00, this is the most significant move by Deutsche today.
Elsewhere Australian Worldwide Exploration only scores an 8% target price rise to $3.50, but with the shares already at $3.60 it cops a downgrade from Buy to Hold. the market is getting carried away with its faith in exploration success, the analysts suggest. (Note that UBS stategists removed the stock from their model portfolio earlier this week).
On the flipside of things, this oil price move by Deutsche should also prove bad news for the airlines. Remember how badly they were hit last year when spot crude passed through US$70/bbl? However, there is a cavalry, and it’s in the form of the Aussie dollar (and Kiwi dollar). The Deutsche forex analysts have shifted their FY08 Aussie dollar price from US$0.7438 to US$0.7975.
(Is it just me, or do you think they may need to go again on that one?)
Anyhoo, the forex adjustments (including the equivalent for the Kiwi) just happen to offset the oil price adjustments so the targets and ratings on Virgin Blue (VBA), Qantas (QAN) and Air New Zealand (AIR.NZ, AIZ.AX) remain unchanged. Virgin stays a Buy, Air NZ a Hold and Qantas a Sell.
Deutsche sees “considerable downside” as Qantas spends big to ramp up its capacity.