Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 215

Oil price projections are no longer gushing

It has taken this long, but many oil market observers are now succumbing to the realisation that the present global oil market dynamics are likely to keep a ceiling on the oil price above US$55 per barrel (bbl) and a bottom below US$45/bbl.

As long as OPEC and Russia remain disciplined, and no major supply disruptions or geopolitical tensions occur, these are the levels at which swing producers in the Permian basin in the USA either thrive or perish, adding more supply or less into a well-supplied global market.

Repetitive scenario for the oil price

It is not unthinkable for the global oil market to go through the same scenario over and again: oil price rises, US frackers add more supply; oil price weakens, the highest cost and most price sensitive producers retreat; oil price rises, those swing producers join in again.

As long as these dynamics remain in place, and demand stays within reach of supply with and without US marginal producers, it seems the current range can remain in place for a long time.

The first seven months of 2017 have seen oil priced below expectations. Research updates on the energy sector in July have led to lowered forecasts, resulting in reduced valuations and price targets. Predictably, this has weighed on share prices.

Consider, for example, that FNArena's consensus price target for Woodside (ASX:WPL) has fallen to near $30 from almost $33 in two months only. For Oil Search (ASX:OSH), the consensus target has fallen from $8 to $7.49. BHP has felt the impact too, with its consensus target falling to $27.45.

Another headwind from stronger A$

An interesting new dynamic for sector investors in Australia stems from the divergence in USD priced oil and the surging AUD/USD on the misguided belief the RBA will soon embark on a tightening course. As such, the stronger Aussie dollar has now become yet another valuation headwind for a sector whose main product sells in USD. On Credit Suisse's modelling, fair value for Woodside sunk to $17.50/share (not a typo), for Oil Search $4.15, for Santos (ASX:STO) $1.90 and for Origin Energy (ASX:ORG) $4.10.

Of course, these numbers are rubbery by nature, and nobody at this stage is expecting oil to remain steady at the current level, nor the Australian dollar to remain near 80 cents against the greenback. But, the broader issue here, argues Credit Suisse, is whether investors should now be paying closer attention to the currency and its possible impact on share price valuations. Credit Suisse thinks the answer is ‘yes’. Oil sector investors should be incorporating AUD/USD into their risk and valuation modelling, and accept it as another negative (‘valuation headwind’).

Sector threatened by long-term price projections

By far the largest threat to energy sector valuations is represented by long-term oil price projections used to make projections about cash flows, revenues and project returns. Short-term oil prices can swing heavily and they impact on share prices through short-term traders and algorithm robots, but large investors take their cue from longer-term projections and assumptions. If investors were to give up on the prospect of oil prices breaking out of the current range in the foreseeable future, this would have significant impact on valuations for energy producers today.

Worldwide, most sector analysts are working off a long-term oil price of US$65/bbl. In July, Citi decided to abandon that anchor and replace it with a long-term oil price forecast of US$55/bbl. Argue the analysts: signs of continuing productivity gains onshore USA have compressed the oil cost-curve.

Citi's research concludes the incentive price to meet future demand has now permanently reduced to US$40-60/bbl. Putting the new long-term price forecast through Citi's models causes valuations in Australia to deflate by between -8 to -23% while profit forecasts fall by between -12 to -50%.

One day before Citi released its valuations, JP Morgan/Ord Minnett had come to the same conclusion. Their new long-term oil price forecast is also US$55/bbl, down from US$60/bbl prior.

JP Morgan/Ord Minnett highlighted why these lower price projections are likely to have a major impact on the outlook, and thus valuation, of Woodside Petroleum:

"Sustained low oil prices have had the effect of not only lowering our estimated value for Woodside, but also potentially delaying or deferring the company's growth projects."

Prediction of moderate price recovery by 2020

To date, most teams of energy sector analysts continue to work off US$65/bbl longer term. At a recent seminar, leading industry consultant Wood Mackenzie reiterated its view of a moderate price recovery for oil remains on the agenda by 2020, when US$65/bbl should be back.

Shorter term, the second half of 2017 could see a bounce in the oil price, while consensus is converging around global over-supply in 2018. The major risk for investors in the sector does not come from marginal surprises in timing and volumes, or from daily volatility which makes perfect timing difficult, but from the fact that more analysts might join the conclusion that US$55/bbl is now likely the new anchor, long term.

Bottom line: crude oil prices remaining range-bound for a prolonged time significantly increases the risk profile for investment opportunities in the sector, with capitulation by financial analysts on the long-term price average representing a tangible threat. Investors should adjust their strategy and exposure accordingly.


Rudi Filapek-Vandyck is Editor of This article is general information and does not consider the needs of any individual.


Headwinds and tailwinds, a decade in review

Why August company reporting season was poor

Momentum or rupture: has demand for oil already peaked?


Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates


Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.


Hey boomer, first home buyers and all the fuss

What is APRA worried about? Most mortgagees can easily absorb increases in interest rates without posing a systemic threat to the banking system. Housing lending is a relatively risk-free activity for banks.


Residential Property Survey Q3 2021

Housing market sentiment has eased from record highs and confidence has ticked down as house price rises slow. Construction costs overtook lack of development sites as the biggest impediment for new housing.

Investment strategies

Personal finance is 80% personal and 20% finance

Understanding your own biases and behaviours is even more important than learning about markets. Overcome four major cognitive biases that may be sabotaging your investing and recognise them in others.

Where do stockmarket returns come from over time?

Cash flow statements differ from income statements and balance sheets, and every company must balance payments to investors versus investing into the business. Cash flows drive the value of the business.

Fixed interest

How to invest in the ‘reopening of Australia’ in bonds

As Sydney and Melbourne emerge from lockdown, there are some reopening trades in the Australian credit market which 'sophisticated' investors should consider as part of their fixed income portfolios.


10 trends reshaping the future of emerging markets

Demand for air travel, China’s growing middle-class population, Brazil’s digital payments take-up, Indian IPOs, and increased urbanisation are just some of the trends being seen in emerging economies.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.