Revised oil forecast and blinkers off

Three oil price forecasts were received yesterday all supporting a select group of high profile analysts as the backbone for the same. Here following I have taken them and averaged the same out lending weight to those seen in the market as being at the top of their game:

Of course any one event could shoot a hole through these figures but if we run through the next three calendar quarters of 2012 in the same manner as the first then these figures will be a good benchmark.

Oil supply concerns have waned significantly since early 2012, as political tension over Iran has eased and evidence has surfaced of rising OECD inventories. Meanwhile, demand globally is subdued. As the IEA has recently alluded, the oil market is probably moving into surplus. Prices could soften noticeably in the coming months in the absence of an upsurge in tension between the West and Iran over the latter’s nuclear programme. This information should mean that most quality airline shares are showing real value at this time and that 2012 will not be a lost year to red ink. This could be the most important information that we have imparted this year to date.

Also, as I sit through yet another conference here in Barcelona after breaking my laptop during the Chelsea win last night, I cannot help but think that this industry does not look from the outside in nearly enough. Respected names, just as they have for a number of years now, take to the stage and try to project some sort of outlook but in the event are unable to put their reputations to anything solid. Of course the exceptions are those speaking about their own companies, but those speaking about the general direction of the global economy and the effect of the same on the industry are all lost.

Of course, even though it sounds very generalized, the aviation industry has mirrored the fate of the housing markets very closely over the past decade or so, and it is not rocket science to see why... The greatest enemy to airlines and lessors is the same as the housing sector - interest rates. This is unfortunate in part as interest rates remain the only weapon not to be deployed by governments in Europe or by the US. The most likely country to increase interest rates in Europe is the UK and if it was to do so, for whatever reason then catastrophe awaits for the over-leveraged housing sector and of course this will send the pound higher and damage all aviation businesses with a GBP cost base.

For the Eurozone we can take comfort in the fact that Germans hate any whiff of interest rate rises with venom, although even they are bracing for an increase at this time and understand more than most that current levels are unsustainable. Most analysts we speak to agree that it just needs either the US, UK or the ECB to increase rates for the other two to follow. Banks would therefore most likely increase their efforts to move ahead of the base rates for new mortgages.

So the message for today is to watch oil but be more worried about interest rates.