Oil demand is expected to increase – majors looking attractive

The Energy Information Administration (EIA), a U.S. official government body, recently updated its short-term crude oil demand forecast. So did the International Energy Agency (IEA), an inter-governmental organisation with 28 member countries. These two organisations are the most reliable sources for research within the oil industry, and they are influential for companies, analysts, investors and everyone involved in the industry. Both organisations forecast growth in demand for 2011 and 2012, primarily led by non-OECD countries like China, Brazil and Middle Eastern countries. Although they differ somewhat in their estimates they both expect growth and a 2012 demand of some 90-91,000 thousand barrels per day (t bbl/d). The results are shown in table 1.

 Looking at the supply side, Libya is one of the main reasons why the oil price has surged over the past six months, as the 1,585t barrels it produces each day (bbl/d) has come down to only 150t bbl/d. To curb this lack of supply, Saudi Arabia has gone against other OPEC members and increased its production to 9,200t bbl/d, up 800t bbl/d since January this year. In chart 1 we have listed the OPEC oil production in January 2011 vs. June 2011.

So, crude demand is expected to increase, while supply remains tight. This should be favourable for oil prices and oil producing companies. In chart 2 below, we have listed the largest oil companies, ranked by lowest price earnings levels for 2013E. BP is the company which trades at the lowest PE at 5.7, followed by ENI (6.5) and Total (6.7). Also, the Consensus spread to target price is shown in red. What can be seen is that ENI is a favourite stock of analysts, with an upside of 29.4% from current prices. BP, ENI and Total are all companies with relatively low PE +/- 6 and an upside above 20% according to analysts.

Be aware that the companies listed have different levels of involvement in Libya, which could explain the uncertainty and underperformance of their share prices. ENI, to mention one, is one of the companies with the highest production in Libya, something that should be taken into account before investing.