Oil and gas industry report - Ciptadana

Spiking price of crude oil in 1Q11 had reached its end and we estimate oil price to experience declining stage but could maintain slightly above the last year average to US$89.00/barrel. Last year average price was US$85.20/barrel and 2011 average price until September, 5 was US$99.07/barrel (WTI). Slowing economy growth in developed countries, coupled by overheating concern in developing countries, especially china, might deteriorate expected demand for short term period. Yet, we are optimistic for long term view of oil price. Growth will be derived from developing countries energy consumptions.

Doubtful world economy growth – Lower than expected financial data in US and uncertainty in Europe solvency issues have slow down developed countries growth. On the other side, developing countries put major concern on rising inflation and overheating economy. Thus, reducing the economy activity is still the best option for them. We are not really excited with the QE III package which probably kicks in as economy recovery from QE1 and QE2 have showed disappointing results so far. We put more weight on sluggish demand problem rather than liquidity and funding crisis which occurred on last crisis, 2007 and 2008.

Solid demand starts to diminish – In line with the economy outlook, OEDC continued reporting negative demand growth and developing countries, especially China, the backbone of the growth, started signaling weakening demand. Although Developing countries demand decelerated, we still expect that it might be sufficient to offset the declining growth from OECD. We might also highlight the possibility of further downside risk from longer-than-expected recovery from US, Europe and Japan economies, and also decelerating pace of oil demand from China and India, the highest and second highest growth contributors.

Well supplied ¬– Oil market is expected to be well supplied. Non OPEC oil supply is projected to increase by 0.58mb/d to 52.83mb/d while OPEC has indicated strong substantial growth in production from the previous month. In July OPEC production grew by 0.4md/d to 30.07 mb/d. Global production might enlarge even larger as Libya production coming in. Abundant supply might suggest additional downside risk to oil price.

Our national oil and gas outlook – Indonesian oil has experienced steady level of consumption since 2000 while production has a tendency to decrease year by year. However, oil demand is expected to ease in the future as continuing effort in replacing oil with gas to meet energy demand has gradually increased. This explains the substantial increase in the gas production as well as its utilization since 2008.