Oil and Gas - Higher crude supplies to keep prices in check; Edelweiss

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Brent crude price has maintained strength so far in CY11 due to a combination of stronger than expected non-OECD demand and supply side issues arising from unplanned outages (non-OPEC) and the unrest in MENA (Libya, Nigeria). We continue to believe that crude is poised for a correction due to: (a) faster than expected production scale-up from Libya/Kuwait/Iraq, (b) worsening economic conditions and (c) an increase in non-OPEC supplies, especially the US. We maintain our call of USD95/bbl for Brent in FY13 while adjusting FY12 Brent crude to USD110/bbl to account for higher YTD average. We are also increasing long-term crude price to USD95/bbl to account for higher fiscal break-even crude prices for OPEC.

CY11 supply-demand trends to reverse in CY12

Crude prices remained strong in CY11 driven by strong non-OECD growth (3%), particularly in Asia and Russia. Japanese demand for crude post nuclear shutdowns too boosted OECD demand. Further, supply shortages due to the unrest in MENA and unplanned outages in North Sea played spoilsport. Going into CY12, we see this trend reversing. Demand growth at 1.1% will be soft given worsening economic conditions. Several leading indicators point to a slowdown outside OECD as well. On the other hand, a sharp ramp up in supplies from OPEC (Libya, Kuwait and Iraq) as well as U.S. (non-conventional oil) will ensure supply is adequate.

OPEC CY12 spare capacity at ~5.0mbpd as Libya/Iraq up output

OPEC spare capacity is set to inch over 5.0 mbpd as the increase in non-OPEC supplies and higher production from OPEC (Kuwait, Iraq, Libya) come at a time when there are significant downside risks to demand estimates. OPEC spare capacity currently stands at around 4.6 mbpd against the lows of ~3.4 mbpd in Jun 2011, seen just after the price peak. We expect CY12 OPEC spare capacity at 4.97 mbpd against 4.63 mbpd in CY11.

Maintain FY13 Brent crude at USD95/bbl, FY12 up at USD110/bbl

Higher Q4 seasonal demand and recent geopolitical tensions have kept crude prices elevated. We expect crude prices to correct post winter as supplies from Iraq/Libya are expected to scale up during the period when demand seasonally trends downwards. Accounting for historical prices and short-term expectation of stable prices, we are increasing our FY12 crude price to USD110/bbl. Factoring in higher CY12 OPEC spare capacity, we maintain our FY13 crude price estimate at USD95/bbl. We are also increasing our long-term crude price to USD95/bbl (USD90/bbl earlier) to account for high fiscal break-even for OPEC countries.