Sydney - Friday -July 1:(RWE Aust Business News) - Sydney based
firm Shaw Stockbroking has has upgraded its oil price assumptions.
"We believe that higher oil prices are sustainable for at least
the medium term, driven by strong supply/demand fundamentals.
"Despite the substantial upgrades our oil price assumptions
remain relatively conservative compared to the current forward curve
out to 2010," the broker says.
It believes all oil producers are highly leveraged to higher
oil prices and Shaw's preferred exposures are BHP Billiton,
Hardman Resources and Amadeus Energy.
Woodside Petroleum, at current price levels, is more suited to
those with a longer term investment horizon.
In light of continued oil strength we have up graded our oil
price assumptions.
Whilst it is always dangerous to forecast on the
basis of price spikes, in this case, there are strong signals that oil
prices will stay high for a few years yet.
Justification for higher oil prices
-----------------------------------
Justification for higher oil price assumptions include many
observations such as:
* Most oil companies use oil price assumptions less than
US$30/bbl to justify capital expenditure. This means investment in
oil infrastructure is less than optimal.
* OPEC members have shown strong cohesion in managing oil
output.
* OPEC's previous desire to maintain a US$28/bbl to US$34/bbl
price range through supply control has been superseded by a
weakening US dollar.
* Most market commentators believe, rightly or wrongly, that
the oil price will eventually come back to the long range of
US$18/bbl to US$23/bbl. This has exacerbated the lack of infrastructure
spending.
* Generally speaking, net oil importing countries are becoming
increasingly more reliant on oil imports.
* Consumers and economies are yet to show any significant
consumption restraint, in particular the US.
*. China's move to private industrialisation and significantly
improving individual wealth means a greater increase in the oil
demand relative to coal.
* China is yet to start filling newly built strategic reserve
oil facilities.
* Oil field discoveries, both in terms of number and size, have
been in decline since the 1960�fs.
* When adjusting for inflation the current oil price is not
excessively high and the price rise over the last several years appears
to more of a trend rather than a short-term spike
Broker quite conservative
--------------------------
Whilst our upgrades are quite significant in percentage terms
it is worth noting that Shaw is still quite conservative compared to
the current oil price forward curve which has oil above US$55/bbl out
to 2010 – that is US$18/bbl above long term price.
This indicates that those closest to oil price fundamentals
believe that tight oil markets will persist for some time.
With such a flat forward curve at high levels there is a strong
incentive for corporate activity where by the acquired producer's oil
price could be locked in through forward sales.
The disparity between the forward curve and broker forecast has
significant implications for valuation differentials and the
opportunity this presents to corporate predators.
Cheers
Markco2
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