In this report, we highlight 10 reasons why oil prices could fall towards
US$50/bbl in the coming months. We think E&P stocks in Asia reflect an
oil price rebound above US$80/bbl, and we would look to sell CNOOC, Cairn
India and PTTEP in the current strength.
■ Room for oil to catch up with fundamentals. Global spare capacity is at
an all-time high, and will remain there even if demand rebounds sharply.
Global inventories (especially for diesel) are high, China demand so far has
been above trend, non-OPEC supply is holding up, and importantly global
refining has ample slack. Spare capacity globally should materially fall off in
2H11/2012, but only if global demand exceeds 1.2 mmbd p.a. Structural
declines in the US and gas substitution in Asia have potential to surprise the
market beyond 2010. Oil so far this year appears to have been driven by
expectation of demand improvement, and concerns about inflation and USD
weakness. These technical factors, however, appear to be waning.
■ A big thump, before you can hear a whoosh. We think that even if news
flow turns strongly positive, oil will be capped at US$75-80/bbl, where Saudi
spare capacity will be fully in play. Weak fundamentals and weakening
tactical indicators suggest bias is on the downside.
■ What to buy and what to sell? We are sellers of CNOOC – it implies a
long-term oil price of US$80/bbl, faces rising costs, and while volume is
growing, margins will be under pressure due to a mix shift towards Nigeria
(higher tax) and offshore China gas (lower margin). We are not positive on
Cairn India and PTTEP. We prefer Reliance, SINOPEC and OGDC. We also
like Indian refiners as a trade.