Lehman Brothers-GLOBAL COMMODITIES TEAM
OIL OVERSHOOTING (ENERGY SPECIAL REPORT)
WE REVISE UP OUR 2008 BRENT FORECAST TO $103/BBL AS PRE-OLYMPIC
CHINESE STOCKPILING, POWER SECTOR OIL PULL AND SAUDI POLITICS ADD TO
STRONG FINANCIAL DEMAND. YET, FUNDAMENTAL WEAKNESS SHOULD EMERGE BY 1Q09, LEADING US TO KEEP OUR 2009 BRENT FORECAST AT $83/BBL.
Oil's recent meteoric rise has been fuelled, in our view, by non supply-demand factors and by potential inventory misperceptions. We judge the two most important factors unrelated
to supply and demand are dollar weakening and investors' desire to be exposed to real
assets, leading to increased inflows from passive long-biased index investors.
US demand has been waning for some time - So where is the crude going then? We think stockpiling in China to prevent shortages ahead of the Olympics and full Iranian tankers in the Persian Gulf (reported to be holding 20m bbls of crude) are the likely culprits.
REASONS FOR CRUDE TO REMAIN HIGH IN THE SHORTER TERM INCLUDE:
1) The continuing standoff over Iranian nuclear enrichment and an ongoing war in Iraq, a major physical disruption remains possible, though difficult to quantify 2) An active hurricane
season in the Gulf. While our meteorologist forecasts between 12 and 15 named storms, their path and landfall are impossible to predict at this time 3) Increased summer power generation in the GCC, strong summer distillate demand or a revived US gasoline market due to rebate checks could cause prices to rise further during the summer season.
WE BELIEVE THAT SEVERAL INDICATORS POINT TO WEAKER RATHER THAN
STRONGER OIL BY YEAR-END:
1) A more bearish outlook for the Chinese and US economies 2) The generation of excess capacity in the refining sector 3) Future upstream additions and Saudi Arabia's commitment to building spare capacity.
THERE ARE ALSO BEARISH SIGNALS THAT SOMETIMES GO UNNOTICED IN TALK OF $200/BBL OIL:
1) long-awaited fields such as Saudi Arabia's Khursaniyah, Nigeria's Agbami, and Azerbaijan's Guneshli have announced start-ups. When fully ramped-up, these should add MORE THAN 1.3MN B/D OF LIQUID CAPACITY
2) Refinery additions such as India's 580k b/d Jamnagar facility should bring more
competition to product markets .
3) The dollar, after a long slide, is likely to rebound after indications that the Fed will hold cuts given rising inflation concerns.
4) Dollar-based core inflation looks tamed going forward, undermining the rationale for using oil as a hedge.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
BigGains !!
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