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 * OPEC's previous desire to maintain a US$28/bbl to US$34/bbl price range through supply control has been superseded by a weakening US dollar.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
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.
