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Dovre Insight: Oil prices in 2012

Spekuliantai.lt | 2012-01-02 | Kitos | perskaitė: 542
Raktiniai žodžiai: Nafta
Dovre Insight: Oil prices in 2012 Dovre Insight: Oil prices in 2012

 The outlook for the Oslo Stock Exchange boils largely down to two variables. Company earnings are controlled by the price of oil while risk premiums determine the valuation of them.

Last year the Oslo Stock Exchange was torn between two opposing forces. Supported by a moderate rebound in oil prices as the total earnings in the Norwegian industry set to grow by nine percent from 2010 to 2011.

However the impetus from rising earnings was more than offset by higher risk premiums. Thus the main index fell 13 percent last year. The stock market was cheaper because the players demanded big discounts due to the uncertainty created by the debt crisis in the euro zone. This is manifested in part by falling P/E- and price / book levels.

In 2012, it is less likely that the risk premiums rise further because they are already at historically high levels. On the other hand, we doubt that they will fall much before the danger of state financial bankruptcies in the euro zone is eliminated. That leaves the question of oil prices?

Financial Crisis lessons

A study of the oil market during the financial crisis gives us important clues. The U.S. economy entered a recession in December 2007, while Europe followed suit in May 2008.

Oil prices continued to go up until July 2008, and remained in the three-digit territory until the bankruptcy of Lehman Brothers. Lehman bankruptcy triggered a systemic crisis in the global banking sector which paralyzed world trade and led to a sharp global recession. Only then oil prices plunged to crisis levels.

What lessons can we draw from this? As long as the debt crisis in the euro zone only manifests itself through a recession in Europe the oil market is not affected significantly. But on the other hand if we were to see a breakdown in the global banking system or choking of growth in emerging economies the downside in oil prices would be significant.

The upside in 2012

We still think that the likelihood of an upside is greater than the downside in 2012. The reason is that the physical market is tighter than ever due to inventory reduction and little spare production capacity. This makes the oil market extremely vulnerable to supply disruptions.

Furthermore, the mixture of strong trend growth in oil consumption in emerging economies and stagnant global production in the oil markets are dangerously near a price rationing scenario where rising prices are necessary to prevent that demand exceeds supply.

In the course of 2012 we expect the Chinese economy reaccelerates while euro zone and possibly the U.S. start money printing. In such a climate it is easy to imagine the galloping oil prices.

Increased oil exposure

In Dovre portfolio, we are increasing oil exposure this week by taking in Statoil and Subsea 7. Statoil appears to be cheap relative to the prevailing oil prices.

Subsea 7 provides a great exposure to one of the world's most powerful mega-trends, oil development in deep water. Moreover the facts that the industry has an oligopoly structure with high entry barriers while maintaining the planet's least price-sensitive customers adds to the attractiveness of Subsea 7.


• Kvaerner

• Morpol

• Funcom

• BW Offshore

• Subsea 7

• Statoil


In: Statoil, Subsea 7

Out: Wentworth Resources, Bionor Pharma






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