OECD Cuts Oil Demand Forecasts as Views on Oil Stocks Diverge

-0.58%
Downside
116
Market
115
Trefis
XOM: Exxon Mobil logo
XOM
Exxon Mobil

The International Energy Agency (IEA) has scaled back its forecast for growth in the demand for oil to 0.7 mb/d for this year and 1.4 mb/d for 2012 on the back of increasing uncertainty in the global macroeconomic environment . [1] The OECD watchdog is revising its figures in the wake of a reduction in GDP growth estimates for industrialized nations. The bearish view was reinforced by OPEC, which has revised its demand forecasts for this period as well. [2] Until now crude oil prices have been resilient during the fall in market confidence. However a decline in demand resulting in lower oil prices could affect our revenue forecast for oil companies such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) , BP (NYSE:BP) and Anadarko Petroleum (NYSE:APC).

We have a $93 price estimate for Exxon Mobil, the largest vertically integrated oil major. Our estimate translates into a 30% premium for the stock over its present market value.

Growing economic concerns hit demand

Relevant Articles
  1. Down 9% Since The Beginning of 2023, What Should You Expect From Exxon Mobil Stock?
  2. Will Exxon Mobil Stock Trade Higher Post Q2?
  3. What’s Happening With Exxon Mobil Stock?
  4. Exxon Mobil Stock Likely To Trade Lower Post Q4
  5. What To Expect From Exxon Mobil’s Stock Post Q2?
  6. Can Amazon Stock Add Two Exxon Mobils To Its Market Capitalization?

Citing the growing worries over government debt in the OECD and currency protectionism in emerging nations, the OECD predicts that a 4.5 – 5% GDP growth may be unsustainable. [1] The agency has cut its growth forecasts to 4% for 2011 and 2012 which in turn reduces the expected growth in oil demand. The agency warns that a more severe slowdown could result in demand growth falling even further to 0.4 mb/d in 2012.

Lower growth in demand can be expected to alleviate the tightness in the supply situation that resulted in Brent touching $120 a barrel in May. The OECD released strategic oil reserves in response to the situation in Libya to help bring down prices temporarily, but with the exception of a fall in WTI crude prices in the U.S., oil prices have remained steady despite the gathering clouds over the economy.

Revenues generated from the sale of oil and natural gas liquids contributes 51% of our price estimate for Exxon and a fall in oil prices could result in a significant downside to our price estimate for the stock.

The OPEC forecast revision mirrored that of the IEA as the organization cut its estimated increase in demand by 150,000 b/d to 1.1 mb/d for 2012. [2] The body also indicated that it in response to lower demand its production may only rise by 500,000 b/d from the earlier figure of 580,000 b/d.

Not everyone is so pessimistic

Despite these gloomy forecasts, analysts at Goldman Sachs estimate that crude prices will average $126 per barrel in 2012, citing the expected tightness in the market as the strategic reserves released by the OECD are used up. The release is meeting 600,000 b/d of the demand for crude presently. [2] The end of the market intervention is expected to constrain OPEC’s spare capacity, resulting in higher prices.

Click here for our full analysis of Exxon Mobil.

Notes:
  1. IEA’s Oil Market Report cuts prognosis for oil demand growth, IEA [] []
  2. OPEC Cuts Forecast for Global Oil Demand and Production, Wall Street Cheat Sheet [] [] []