Aleem Khan

The price of oil has stayed with­in a US$14 per bar­rel range for most of the past two years, said Mor­gan Stan­ley on its May 30 out­look pa­per.

Robert Pul­leyn, Jes­si­ca Alder­son and Mar­ti­jn Rats said in their re­port: "We ex­pect oil prices to most like­ly be range bound go­ing for­ward."

Oil has large­ly trad­ed with­in a range of US$14 per bar­rel (bbl) around an av­er­age of US$111/bbl since Feb­ru­ary 2011, the an­a­lysts said.

"We ex­pect a large­ly range-bound en­vi­ron­ment for crude prices. Mor­gan Stan­ley's com­modi­ties team fore­cast a near-term re­bound to US$110-115. How­ev­er, we do not see a mul­ti-year trend of more than ten per cent av­er­age growth as like­ly," the an­a­lysts said.

"In an en­vi­ron­ment of range-bound prices, lim­it­ed vol­ume growth and con­straints to fur­ther bor­row­ing, the fi­nal lever to in­crease up­stream cash flow is the mix of projects. How­ev­er, we do not ex­pect a sig­nif­i­cant im­prove­ment in the cash gen­er­a­tion of the projects we fol­low and types of pro­duc­tion fore­cast.

"As dis­cussed above, the cost of oil­field de­vel­op­ments has risen dra­mat­i­cal­ly over the past ten years due to cost in­fla­tion and the move to­wards ever larg­er, more com­plex projects, such as deep­wa­ter, nat­ur­al gas liq­uids (NGLs), oil sands, heavy oil, and oth­er un­con­ven­tion­als, like shale," Mor­gan Stan­ley said.

The an­a­lysts not­ed that "oil prices have not ex­pe­ri­enced the same de­clines as oth­er com­mod­i­ty prices."

Giv­en the strong re­la­tion­ship be­tween the oil price and in­dus­try's op­er­at­ing cash flow, to fund in­vest­ment, the an­a­lysts say they see the con­trast be­tween oil prices and com­mod­i­ty prices "as key to the dif­fer­ence be­tween the oil and min­ing sec­tors. Ex­hib­it 11 il­lus­trates the re­spec­tive price move­ments (in US$) among Brent crude, cop­per, gold, nick­el, zinc, cok­ing coal, ther­mal coal, and iron ore since Jan­u­ary 2011."

"As high­light­ed above (in the graph), oil has been large­ly range bound over this pe­ri­od, as has gold. How­ev­er, the oth­er com­modi­ties have fall­en over this pe­ri­od by around 30 per cent, with half of this fall oc­cur­ring in the last six months. We see this as key to un­der­stand­ing the re­duc­tion in min­ing in­vest­ment, giv­en the de­te­ri­o­rat­ing eco­nom­ics and low­er-than-ex­pect­ed cash flows avail­able for fur­ther in­vest­ment," the an­a­lysts said.

Look­ing ahead, they said: "Off­shore seg­ments are ex­pect­ed to have the strongest in­vest­ment growth. In ad­di­tion, we note that Eu­ro­pean oil ser­vices are pri­mar­i­ly ex­posed to the off­shore mar­ket."

"Deep­wa­ter and ul­tra-deep­wa­ter, where bar­ri­ers to en­try are high­est, are fore­cast to de­liv­er more oil and gas vol­umes," the Mor­gan Stan­ley an­a­lysts said.

Mor­gan Stan­ley said its "off­shore out­look (is) un­der­pinned by planned pro­duc­tion ad­di­tions, and en­hanced re­cov­ery."

The an­a­lysts said: "We con­tin­ue to see strong off­shore in­vest­ment growth, though be­low the last decade's pace, giv­en the ex­pect­ed gross pro­duc­tion ad­di­tions from off­shore, at­trac­tive off­shore eco­nom­ics at cur­rent prices and the in­crease we ex­pect in sub­sea pro­cess­ing tech­nol­o­gy to im­prove ex­ist­ing reser­voir re­cov­ery rates in ma­ture basins.

We see ex­pec­ta­tions for a three-fold in­crease in oil & gas pro­duc­tion from ul­tra-deep­wa­ter fields (over 1,500 me­tres deep) by 2020, as well as a 30 per cent in­crease in deep­wa­ter (125-1,500 me­tres) pro­duc­tion, with these 2 seg­ments in­creas­ing from 7 per cent of glob­al oil pro­duc­tion in 2000 to 12 per cent by 2020 and 18 per cent by 2035."

The au­thors high­light­ed that "this off­shore mar­ket seg­ment has the high­est bar­ri­ers to en­try, giv­en tech­ni­cal chal­lenges, (and the) the tight­ness we see in (the) ca­pac­i­ty for the top-end of the mar­ket, and the ex­pe­ri­ence/track-record re­quired to win con­tracts in this space. We ac­knowl­edge that the oil ser­vices in­dus­try has added sig­nif­i­cant ca­pac­i­ty since 2003, in­clud­ing in the off­shore mar­ket.

"Con­se­quent­ly, we do ex­pect a more mod­est growth out­look for the sec­tor to lead to a sim­i­lar mod­er­a­tion in pric­ing pow­er, mar­gin ex­pan­sion and re­turns. How­ev­er, we would ar­gue that com­modi­tised seg­ments of the ser­vices sup­ply chain.

"Fur­ther­more, we be­lieve deep­wa­ter en­gi­neer­ing, equip­ment and in­stal­la­tion re­main amongst the most spe­cialised sub seg­ments and there­fore are more pro­tect­ed from these trends."

With­in the off­shore out­look, Mor­gan Stan­ley said it re­mained "up­beat on the out­look for projects util­is­ing sub­sea pro­cess­ing to ei­ther max­imise re­cov­ery from ex­ist­ing ma­ture fields, tieback satel­lite fields or en­able pro­duc­tion in ever deep­er wa­ter."

They said: "In ad­di­tion to deep­wa­ter off­shore, we con­tin­ue to see an en­cour­ag­ing out­look for gas de­vel­op­ments, giv­en our view on liq­ue­fied nat­ur­al gas (LNG) and po­ten­tial us­es of gas in trans­porta­tion."

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