Commodities | Jan 17 2013
– Oil price forecasts for 2013 not much different from 2012
– Analysts see more demand being offset by rising supply
– Saudis seem determined to not let price of oil weaken
– Equity investors advised to look for stock specific catalysts
By Andrew Nelson
As 2012 drew to a close it was really starting to look like energy prices were finding a much needed base. Oil price fundamentals seem to be improving, risks to global oil markets are coming into balance and if the outlook for crude oil isn’t unreservedly positive, at least it’s not all that negative.
Yet while the economic drivers of energy demand are becoming increasingly supportive, it’s also true that increasing supply from the US and elsewhere will provide a significant offset. How significant? Well, analysts from Deutsche Bank think this year will be much like the last one, where commodity prices provided some earnings momentum, but stock specific issues were the real drivers for equity prices.
One of the main factors driving the Australian energy sector is the number of LNG projects that have been greenlighted since 2009 and are still under construction. Thus, Deutsche thinks 2013 will remain a year of cost and timeline pressures. And while the broker expects limited news flow, it feels the market will still be speculating on delays and cost overruns and picking apart every last detail for news. It will go better for lower risk projects, says the broker, who points to PNG LNG’s limited exposure to Australian cost inflation and resource constraint issues.
Deutsche backs the prediction for positive economic growth in 2013, which of course would be a positive for oil demand in its opinion. This is especially so given the expectation the US will join emerging economies as an actual source of demand growth, despite higher domestic production expectations.
Thus, the supply picture, as always, is just as important, and again as always, much more complex. We’ve got Iranian sanctions and disappointing North Sea production to contend with and these are supportive of oil prices. Although increasingly robust US supply, led by new forays into shale oil production will certainly supply some downside risk. On the balance, the broker expects a reasonably benign year for oil prices and is looking at an average crude price of US$112.50/bbl Brent in 2013.
The broker starts the year liking stocks with earnings growth from increasing production levels already in place and where higher prices will more easily flow through as a positive catalyst. In this regard, Oil Search ((OSH)), Woodside ((WPL)) and Aurora Oil & Gas ((AUT)) remain Deutsche’s preferred exposures heading into 2013.
JP Morgan isn’t quite as concerned about the amount of US supply expected to come on line, noting new supply just won’t be enough to contain upward price pressures, although its view goes out through 2014. On the broker’s numbers, global oil inventories are drawing by approximately 300 kbd in both 2013 and 2014. This, says the broker, will keep the market tight. The broker also points out that the recent 700kbopd or so cut to Saudi oil output from December to around 9mmbbls/d is a pretty good sign that this key producer will do what it can to keep prices at or above current levels.
As such, JP Morgan has Brent crude at an average US$122.5/bbl in 2014, while US$115/bbl is the mark set for 2013.
Other than that, JP Morgan is in-line with Deutsche’s view that 2013 will be a real a tug of war between the oil bulls and the project execution bears. Given this view of slightly average higher prices and project scrutiny, the broker likes the look of Woodside’s large scale oil exposure given it is now pretty much ex-capex and entering a balance sheet deleveraging phase. Amongst the smaller caps, the broker likes Buru Energy ((BRU)), which it thinks offers a nice and pure play on what is still a highly prospective Canning Basin.
JP Morgan also handed out a few words of caution, noting that while Santos ((STO)) seems to offer the most in terms of upside share price risk, it also has some of the biggest risks of having to revisit the market and shareholders on potential capex project cost overruns.
And for a bit of seeming unanimity, UBS also thinks investors will be eyeing off companies with substantial exposure to Australian LNG after the run of capex increases last year. Yet with that said, UBS also expects the short term price of gas in Queensland to push past $10/GJ by 2016. While admittedly a ways off, once these higher gas prices become more tangible, the underlying economics of unconventional gas development will certainly start to look more attractive, as will Santos ((STO)) and Beach Energy ((BPT)) given their Cooper Basin resources. At least that’s what the broker thinks.
As far as crude oil goes, UBS is certainly the most bearish of the lot. While the broker has lifted its Brent forecast by US$5, it’s only to an average of $107/bbl, believing fundamentals will only ease, while it otherwise sees significant supply-side and geopolitical risk causing uncertainty. While the US$107 is a base, UBS does think crude prices will trade in a pretty wide range, buffeted by the aforementioned geopolitics and continued global macro uncertainty.
With this year looking a lot like the last one, Oil Search remains UBS’s top pick for 2013. The broker cites numerous catalysts, which should be hopefully crowned by an early commissioning of PNG LNG liquefaction trains by the end of 2013. Otherwise, Santos is at Buy on valuation grounds despite the GLNG capex risks, while Woodside is a Neutral given ongoing questions marks about the strategy.
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