Edelweiss:: Oil and Gas - outlook on crude remains buoyant

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Oil and Gas - outlook on crude remains buoyant

n  CY10-15E global crude demand to post 1.3% CAGR

The International Energy Agency (IEA) estimates CY10 global crude demand at 87.3 mbpd, much above the earlier peak of 86.7 mbpd (CY07), on the back of faster-than-expected global recovery. The pace of recovery has been sharp, as evident from revisions by the International Monetary Fund (IMF) on global GDP growth for CY10E (1.9% in April 2009 to 4.2% in October 2010). Of the total demand increase of 2.34 mbpd (in CY10), OECD contributed 0.44 mbpd and non-OECD the remaining 1.90 mbpd. Going forward, we expect global crude demand to post CAGR of 1.3% (CY10-15E) or average 1.2 mbpd per year, to 93.2 mbpd in CY15E. The rise in demand is despite (-0.8%) negative growth CAGR for the OECD economies. China, Saudi Arabia and India are key countries contributing to the demand growth during the same period.

n  Crude capacity to remain flat; spare capacity to dip in CY12E

Overall crude + natural gas liquids (NGLs) capacity is expected to increase by only 0.5 mbpd every year over the next two years, to 94.3 mbpd in CY12E. Most of the increase in crude + liquids capacity is expected to come from OPEC NGLs that rise by 0.6 mbpd every year. Crude capacity for both OPEC and non-OPEC countries are expected to broadly remain flat during the same period. CY13 onwards, Iraq could be a dominant contributor to the capacity addition of OPEC countries. Slower increase in crude and liquid supplies over CY10-12 (0.5 mbpd/year) compared with demand increase (1.2 mbpd/year) will lead to increased dependence on OPEC crude. OPEC spare capacity is likely to decline CY11 onwards, to less than 5% of total crude demand in CY12E. As usual, Saudi Arabia remains a key contributor to the spare capacity. As the spare capacity heads towards 5% of global demand or 4.5 mbpd, crude prices are expected to increasingly turn volatile.

n  Crude speculation at all-time high; increasing FY12E, FY13E crude price

Crude prices reflect spare-capacity fundamentals nearly three months ahead of the period when spare capacity falls below 5% of crude demand. We, therefore, expect crude prices to reflect increased volatility H2CY11 onwards (spare capacity to fall in Q1CY12). This will be amplified by the impact of increased speculation in crude (crude speculation currently at all-time high). We do not rule out crude price averaging >USD 100/bbl in Q3CY11 as well. Hence, while we maintain our FY11 crude price estimate at USD 80/bbl, we are increasing our FY12 and FY13 crude price average to USD 90/bbl and USD 95/bbl, respectively. Over the long term, we anticipate an environment of higher crude prices on the back of higher asset inflation driving up crude prices. The scenario will, however, be offset by increased supplies from Iraqi crude. Hence, we maintain our long-term crude price assumption at USD 90/bbl.