BUSINESS & FINANCE
Justin Scattini, Ord Minnett Buderim.
SHORT-TERM VERSUS LONG-TERM OIL PRICE
O
il prices have climbed nearly 20 per cent in the year to date, adding to the around 30 per cent gain in second-half of 2017. This has led to very healthy gains for investors in energy shares. The current oil price of nearly $US80 per barrel are well above our forecasts. There are reasons to suggest this could be sustained in the near term, providing upside to energy company earnings and valuations. For the longer term, however, our forecasts assume that prices gravitate back towards the low $US50s, in line with lower break-even levels. Our oil and gas equities coverage currently assumes Brent oil prices averaging around $US65 per barrel in CY18, $US60 per barrel in CY19, and $US55 per barrel in
CY20. The current Brent oil price is some 20 to 40 per cent above these forecasts. The surge in oil prices can be attributed to a number of factors: • Stronger global growth – We estimate this has contributed to global oil demand growth rising from 1.3 per cent to 1.7 per cent in 2017, an increase of 0.3 million barrels per day (mbpd). • OPEC production cuts – These have offset some increased supply from non-OPEC countries. Under the OPEC directive,
“Our forecasts assume that prices gravitate back towards the low $US50s” members – along with selected non-OPEC countries such as Russia – are targeting a 1.8mbpd cut to production. These cuts are expected to remain in place until the end of 2018 (we note OPEC meets next on 22 June). • Sanctions on Iran – The US has withdrawn from the Iran nuclear pact and is re-imposing economic sanctions on Iran. This could see oil exports from Iran drop by 0.5mbpd.
• Periodic geopolitical risks – The US/North Korea relationship has been precarious at times, while simmering tensions in the Middle East (for example, in Israel, Iran and Syria), militant attacks in Libya and political struggles in Venezuela threaten to disrupt supply. Demand has thus started to outstrip supply in 2017, which in turn is seeing OECD inventories fall. The above factors could also see oil prices trend towards a more bullish scenario of $US80 to $US90 per barrel in 2018, according to our global research counterparts. Beyond 2018, though, the above factors may not persist, and higher spot prices may also induce investment in production and a return of supply. For the longer term, our global research counterparts have looked to break-even prices (a price that allows revenues generated to meet obligations), as guidance for a more sustainable oil price. In their view, break-even settings could see oil prices gravitate back to the low $US50s eventually. Justin Scattini is an authorised representative (no 427053) of Ord Minnett Ltd, AFS licence 237121. He can be contacted on 5430 4444. This article contains general financial advice only and does not consider your personal circumstances; you should determine its suitability to you. Before acquiring a financial product you should consider the relevant product disclosure statement. Past performance is not a reliable indicator of future performance.
STORES UNITE FOR A CAUSE Uniting as one, IGA retailers across Queensland, including the Sunshine Coast, came together to support Montrose Therapy and Respite Services for the annual race day. The IGA Raceday at Sunshine Coast Turf Club raised $50,000 to provide vital care to clients with complex physical disabilities and rare neuromuscular disorders. Roz White from Whites IGA, who has been a supporter for Montrose Therapy since 2010, thanked the community for their assistance, “It’s so heartening to see our industry and the community come together to support a wonderful charity such as Montrose.” Montrose CEO Peter Stewart also expressed his gratitude to IGA Sunshine Coast and Sunshine Coast Turf Club.
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