Oil prices to hover at US$50-US$70 for next three years: CIMB
By Frankie Ho 10 Apr 2015
Oil prices will enter into a “semi-permanent lower range” of US$50 to US$70 a barrel for the next three years and could follow a W-shaped path within this band, making it harder for oil companies to plan investments and budgets, according to CIMB.
“Oil price volatility is negative for oil companies as it makes planning trickier and more difficult,” CIMB analysts Lim Siew Khee and Yeo Zhi Bin wrote in a note.
“Moreover, a lower capex budget pinned to a lower range of oil prices implies that unconventional sources of oil & gas such as deepwater, oil sands, Arctic and LNG projects would be capped.”
As far as offshore oil and gas companies listed in Singapore are concerned, the end of a low-volatility oil-price cycle means growth and returns will be lower than expected, they said, adding that stocks in the sector will also face “longer-term de-rating”.
“With a view that oil prices would be at a lower range and that offshore and marine asset classes are suffering from various degrees of oversupply, we deem that a multiples reversion (to the five-year mean) for our O&M universe is unlikely in the next two to three years.”
Still, there could be trading opportunities in the near term, they said, noting that oil prices could bottom out within the next three months.
“Studying the previous downturns in oil, we believe that there could be 10% to 20% upside from price returns from oil equities in 3Q15, if oil prices were to trough in 2Q.
“Contrary to intuitive thinking, it is not necessary for oil equities to rally only after the commodity has turned.”
In any case, small-and mid-cap oil service providers offer greater value than the rig builders, they said.
“Following the jack-up rig boom in 2011-14, we believe that the rig builders could face an order drought.
“For the more ubiquitous offshore support vessel sub-segment, we believe that industry consolidation could take place and the stage is set for the survival of the fittest.”
CIMB’s preferred stocks are Ezion and Pacific Radiance. It has an “add” rating on both companies and respective price targets of $1.51 and 95 cents.
WTI crude net-long jumps by 15.6% The break above $54 resistance on WTI crude on April 15 triggered a another jump in bullish bets. The combined net long position of WTI traded on the Nymex and ICE exchanges rose by 41,000 lots. However, the break higher in price failed to attract new longs with almost all of the buying being driven by short-covering. Not to say that short-covering cannot drive this rally higher but it does raise some questions about the sustainability of the move with funds reluctant to increase exposure further at this stage.
"The top of the current bull mountain might not be close but unless there is a fundamental change in the physical supply/demand balance, the rock might start rolling back down shortly again just like it did in the second half of 2008 and 2014 only for the bulls to start the arduous uphill battle all over again".
Despite the punishment U.S. shale companies have taken on the stock market in recent months, Goldman said "a new industry will likely be born out of this environment," characterized not just by lower oilfield services costs and rig rates but also by productivity gains.
How shale companies will emerge from the oil slump ~ Technological advances in the US have made it possible to extract oil at commercially viable rates from rocks that were previously inaccessible, unleashing a surge in production. But the industry has been a victim of its own success: oversupply has sent crude prices tumbling from their peak of over $100 per barrel last summer.