Arjun Murti, formerly the world’s most bullish energy equity analyst, is back.
This time he is cutting the Goldman team’s 2009 WTI oil forecast one more time to an average of $45/bbl from $75/bbl (versus an original $200/bbl). He is also saying the crude markets have entered the bottoming phase of the cycle:
Oil markets in final phase of downcycle
Further deterioration in global oil demand has led us to again lower our 2009 WTI oil price view, though we believe oil markets have entered the bottoming phase of the cycle. We believe the oil price will trough in 1Q2009, with moderating global oil demand declines and increasing non-OPEC supply declines being the keys to the timing and magnitude of recovery in 2H2009 and 2010.
Not to misunderstand - Murti’s lowered oil price outlook doesn’t mean the team is incrementally more bearish on ‘Energy equities’ (capital E). Murti explains:
Our global energy team is sticking with a defensive posturing within the Energy sector for now, though we have gained comfort in recommending select higher-beta stocks that we might call “offensive defensive” ideas (primarily hedged E&Ps with transformational growth opportunities). We think a move back to high-beta names that would benefit from a future rally in oil prices is still several months away.
As for making sure that bottom really does come through the key indicators will be:
1) Demand declines decelerating
2) non-Opec supply declines accelerating
3) Opec cuts coming through
While global oil demand is very weak and the duration of demand weakness is unclear at this time, we believe oil supply will collapse if prices remain below $40/bbl for an extended period of time (6-12 months or longer) suggesting we are likely to have entered the bottoming phase of the cycle.
This is all the more enforced by the super-contango, says Murti. This is because “super contango markets are by definition unsustainable and often mark the bottom portion of the cycle”.
Speaking of the contango, it’s interesting to note the degree its depth moderated in the last two days following the note from Goldman’s commodities team earlier this week advising clients to, err, sell the back-end.
Back to Murti’s team — they do offer some insight into what went wrong for their original forecast. This was:
What changed to account for the collapse?
• US/OECD demand declines accelerated in 3Q2008 and the economic outlook for key non-OECD economies started to change for the worse.
• While the supply outlook has actually deteriorated further, oil demand began to decline globally in 3Q2008 such that priceinduced demand rationing was no longer needed. Said another way, flat supply versus negative demand means oil markets suddenly became oversupplied in 3Q2008, a situation that has worsened in 4Q2008.
• As a result of the abrupt change in global oil supply/demand balances, oil markets shifted from looking for the “demand destruction” price to the price needed to curb supply—what might be called the “supply destruction” price.
• As the global economic outlook has worsened and expectations for the depth and duration of the downturn have increased, oil prices have continued to fall as greater amounts of “supply destruction” have been needed.
Just in case you were to buy into the current Goldman view, you’ll be glad to know Murti’s team does provide some key risks to its forecasts. These include the “duration of sharp global oil demand declines” and the “timing of future supply shortfalls.”
All that said, Alphaville was at an industry party yesterday and confirms there was a lot of talk about people not shorting crude anymore.
Related links:
Has crude bottomed? - FT Alphaville
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