Crude oil prices are set to steadily rise over the next four years and will take the earnings of major oil companies along for the ride, UBS told investors Thursday.
The firm now sees crude oil prices averaging $115 a barrel this year and reaching an average of $156 a barrel in 2012. This will benefit major oil companies including Chevron Corp. (CVX), which it upgraded to buy, as well as oil service and drilling companies, several at which UBS started coverage Thursday also with buy ratings.
The move marks a major switch in UBS' view of crude oil prices, which it had expected to pull back in the face of reduced demand due to concerns about a recession in the U.S. Goldman Sachs also raised its expectations for the oil market last week - both firms revised their views upward as benchmark crude futures in New York rose by around a third in just the past three months.
Goldman last week put forward two scenarios for the oil market - either a "super spike" to as high as $200 a barrel over the next two years before dropping precipitously to a "normalized" price of $75 a barrel in 2011, or a more gradual ramp-up in average prices to $120 a barrel by 2010, and lasting for a few years before falling again.
UBS' view seems to cut the difference between Goldman's scenarios - the firm sees crude marching steadily higher to an average of $156 a barrel by 2012, with its normalized price reaching $96 a barrel in 2013, or $82 a barrel in today's dollars. The normalized price represents an estimated minimum producers need to charge in order to generate enough returns to stay in business.
UBS analyst William Featherston said that it's not speculators who are pushing prices higher, but the long-term fundamentals of demand growing faster than supply. Recently, prices have been pushed higher for a variety of reasons, he said, including critical supply setbacks in non-OPEC countries as well as interruptions in Nigeria, a cut-off of exports from southern Iraq and higher than expected demand outside the U.S.
In addition to Chevron, UBS believes other oil majors are set to benefit from these trends, and it recommended investors buying (in order of preference): Occidental Petroleum Corp. (OXY), Apache Corp. (APA), ConocoPhillips (COP) and Exxon Mobil Corp. (XOM).
The firm also started coverage with buy ratings at oil service, drilling and equipment firms Transocean Inc. (RIG), Diamond Offshore Drilling Inc. (DO), Noble Corp. (NE), Ensco International Inc. (ESV), Atwood Oceanics Inc. (ATW) and Rowan Cos. (RDC).
The firm also increased the allocation of energy companies in the portfolio strategy it recommends to investors to account for its more bullish view of oil prices.
Benchmark crude prices closed Wednesday at $124.22 a barrel and traded up about 1% premarket Thursday.Last Updated ( Friday, 16 May 2008 )