Demand keeps falling. The outlook for oil demand has deteriorated due to weak global economic growth. Three major energy agencies, IEA, EIA and OPEC, continue to lower their demand projections for FY09. Based on their latest forecasts in Mar 09, global oil demand in 2009 is expected to contract by 1.2% (OPEC) to 1.6% (EIA).
These projections are much lower than previous forecasts. The International Energy
Agency (IEA) expects global oil demand this year to shrink by as much as 1.4 mmbopd, after a drop of almost 300,000 bbl/d in 2008. OPEC forecasts a 1.0mmbopd drop for 2009.
Maintaining oil price forecasts. We are maintaining our crude oil price assumptions US$45/bbl for 2009, US$55 for 2010, and US$60/bbl for 2011 onwards. We remain optimistic on crude oil prices in the longer term and expect prices to recover to US$60/bbl within the next three years as oil demand improves along with the global economy and lower oil supply growth. We believe that long-term supply and demand dynamics will keep crude oil prices elevated as many of the major older fields are depleting. In addition, with prices at current lows, there will be less incentive for oil companies to invest and expand. However, downside risks to our assumptions could come from a prolonged economic slowdown.
Maintain UNDERWEIGHT. We are maintaining our UNDERWEIGHT gas sector. With a negative near-term outlook for oil prices, E&P companies’ will be lower in the next few years, especially for those with high crude oil-based revenue but limited volume growth. Lower crude oil price assumptions are also negative for the DCF-based valuations of E&P companies.
We are maintaining our UNDERPEFORM ratings on PTT and PTTEP. PTTEP’s earnings would be affected by low oil and gas prices. Its volume growth should be affected by less domestic gas demand as the Thai economy contracts. PTT’s outlook is also not positive due to: 1) slow domestic gas demand; 2) less earnings contributions from its refinery and petrochemical associates; and 3) lower chances for the government to raise its gas pipeline tariffs. Our top pick for the sector remains PGAS, which should be less affected by weak oil prices as its current gas selling prices of US$5.50 are still at 30-40% discounts to domestic diesel prices. Strong volume growth from PLN should also more than compensate a drop in PGAS’s gas volume sales to industrial customers.
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