LONDON The risk of demand destruction in the United States is underestimated by the market, an Investec fund manager said on Wednesday, predicting a weaker U.S. summer driving season and a fall in the oil price as a result.
"Looking back over 30 years, when you see (U.S.) gasoline prices at over 9 percent of personal disposable income you see a demand reaction, and we are at 10.5 percent," said Jonathan Waghorn, co-manager of the Investec Global Energy Fund.
In total Waghorn runs some $4 billion in the energy equities strategy, including institutional mandates.
"That would lead us to believe there is going to be some demand destruction, and we will find out about it three months later," he said at the Reuters Global Energy and Climate Summit.
Investec believes Brent will average $105 a barrel this year, which is higher than the $100 average in 2008 when prices got up to $147 a barrel. "But it wasn't the spike to $147 that caused demand destruction... it was already happening."
"If we spike to $140, close your trade pretty quickly because the route down is going to be pretty sharp," he said. "A rebalancing is required at some stage and all eyes are on the U.S. consumer to see how quickly that starts to happen."
Waghorn is bearish on prospects for the U.S. summer driving season, believing it will be weaker, with the potential for a single digit decline in gasoline demand year-on-year.
As a result, he sees oil prices taking a hit and is relatively cautiously positioned: "We're surprised that Brent crude prices are as strong as they are given the concerns over economic growth, the slowdown and the overall demand picture."
Waghorn is focused on the U.S. as, among the developed economies, this suffers the greatest pass-through of wholesale prices to consumer prices at the petrol pump, along with Japan.
Currently, U.S. gasoline prices are just under $4 a gallon. Waghorn believes demand destruction is happening at this level as consumers react to the rate of change in price, the absolute level of price and the memory of high prices in 2008.
The price of gasoline is likely to become a political issue with U.S. elections pending in 2012. "Consumers are going to vote with their personal disposable income," Waghorn said.
He expected higher electricity and gas prices in the home to hit household budgets, also leading to a reduction in driving.
However, the risk of demand destruction has not been entirely factored in by markets, he said, and he expected volatility to rise from here.
As a result, he has mainly invested in big, liquid stocks, with a bias to integrated oil companies, seeing a minimum 35-40 percent upside in stocks such as BP (BP.L), Royal Dutch Shell (RDSa.L) and Total.
The latter has a 7 percent dividend yield and is trading on 7x earnings for 2012. "It looks very cheap at this point in time," he said.
"We are increasingly seeing value in some of those oil names, because 18 months out from now we are going to have very high crude prices again."