Oil Price Upside

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

By Chris Shaw

Oil prices have been volatile of late and this trend is expected to continue in the view of Commonwealth Bank, as oil market fundamentals are not tight a present. As the bank's chief commodity strategist David Moore notes, this implies the oil price remains vulnerable to shifting perceptions with respect to the international economic outlook.

Here the news is at least turning more positive, as the International Monetary Fund ((IMF)) has lifted its world growth forecast for 2010 to 4.6% from 4.2% previously. Growth in 2011 is forecast to be 4.3%.

Moore expects a recovery in the international economy will help support steady growth in world oil demand, which in turn supports his view oil prices should trend higher over the medium-term. The oil price has climbed in recent sessions, Barclays Capital seeing this as the market slowly returning its focus to the fundamentals.

The most recent Weekly US Department of Energy (DOE) statistics were positive, showing a draw of 4.96 million barrels on crude stocks. Barclays notes this has reduced the market overhang. US demand data was also positive, as demand in that market is running at well over 450,000 barrels per day higher for the year-to-date when measured in year-on-year terms.

Danske Bank has not read too much into the latest US oil stock drawdown however, noting the change was largely due to hurricane Alex forcing some US producers to cease production during the period. There remains scope for additional weather-related production disruptions in the bank's view, which it suggests would further improve the supply side of the equation.

As CBA's Moore points out, while non-OPEC supply has increased it remains constrained. Barclays agrees, offering lower Norwegian output this year as evidence of this trend. As Well, Moore suggests OPEC is unlikely to quickly lift its production targets given the current uncertain market environment.

In terms of price forecasts, CBA's Moore expects oil prices will trade around US$75 per barrel in the current quarter, rising to US$77 per barrel in the December quarter and US$78 per barrel in the March quarter next year. Price gains should then accelerate as Moore expects a price of US$90 per barrel in the December quarter of next year.

Danske Bank sees prices averaging US$81-$82 per barrel in the second half of this year, before rising to US$90 per barrel in 2011 as OECD demand increases. RBS Australia is a little more conservative with its estimates and having changed its forecasts the broker expects average prices for Brent crude of US$78.50 per barrel this year and US$82.50 per barrel in 2011. In 2012 the broker expects an average price of US$88 per barrel.

The RBS forecast for 2012 is below market consensus, reflecting the view an increase in OPEC supply will act to cap price gains. The broker also sees risk of a sharper than expected slowdown in Chinese economic growth.

In terms of preferred exposure to the sector, RBS has Buy ratings on Australian Worldwide Exploration Ltd ((AWE)), Beach Energy ((BPT)), Oil Search ((OSH)), Origin Energy ((ORG)), Roc Oil ((ROC)) and Santos ((STO)). AWE is RBS's preferred pick for exploration exposure given current drilling activity, while Oil Search is preferred over Santos in terms of the producers.

Both Tap Oil ((TAP)) and Woodside Petroleum ((WPL)) are rated as Holds, Tap having been upgraded from a Sell rating following recent share price weakness.

With respect to how the rest of the market views the oil stocks, the FNArena database shows Sentiment Indicator readings of 0.7 for AWE, 0.4 for Beach, 1.0 for Oil Search, 0.9 for Origin, 0.0 for Roc and 0.8 for Santos. Woodside has a Sentiment Indicator reading of 0.4 and Tap of 0.0.

Click to view our Glossary of Financial Terms