Sweet 16 is over-sold and should move UP into year-end

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dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Sweet 16 is over-sold and should move UP into year-end

Post by dan_s »

This morning Raymond James' US Equity Research Team published their updated Oil Price Forecast. They are lowering their WTI forecast to $70/bbl in Q1 2022 and then ramping it up to $80/bbl by year-end 2022. However, they are extending their $80/bbl forecast thru 2023. Note that in their conclusion below that there is upside risk to the forecast. If you want to read the full report, send me an email: dmsteffens@comcast.net
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RJ's Conclusion: Futures strip needs to move toward $80 to keep inventories from plummeting to dangerously-low levels. While a lot has changed since our previous update, the conclusion we come to for the oil markets is very much the same - prices need to move meaningfully higher than futures strip to incentivize enough supply growth to reach a roughly balanced oil market by the end of next year and for 2023.
> While the spreading Omicron variant remains a demand concern in the short run, we certainly do not expect anywhere near the same level of lockdowns (or demand impact) as we saw with prior waves, and overall we remain bullish on medium/longer-term growth.
> With a more or less normal demand environment in 2022 (we view "normal" as roughly 2019 demand levels), the math simply doesn't work - even with OPEC+ supply reaching 4Q19 levels in late-2022, crude inventories and days of consumption are both set to reach extremely low levels.
> The latter (OECD days of consumption), which has been a very good gauge of crude prices over the last decade, could fall to levels never previously recorded as soon as 1Q22.
Considering all this we believe it is clear the oil futures strip has to move substantially higher from today's level.
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MY TAKE:
> Oil prices pulled back on FEAR of the new Omicron COVID variant.
> I believe that the FEAR far out-weights the actual impact it will have on oil demand.
> Why? because oil-based inventories are TOO LOW and must be replenished for the world economy to run smoothly.
> Demand for oil is seasonal. After the holiday season (New Years Day) demand for oil-based products drops for a few months. Demand then ramps up sharply in March & April as refiners must increase summer blend gasoline inventories, which require more crude oil.
> At the same time demand is spiking, OPEC+ will run out of spare capacity. OPEC+ is already having trouble producing up to their quotas.
> FEAR based price declines for crude oil never last long. So, I think RJ's forecast of $70 WTI average in Q1 2022 will prove to be too low. On November 29 in Houston (after "Black Friday") Marshall Atkins' opinion was that WTI would spike to $110/bbl by mid-2022.
> For now, I am sticking with my forecast that WTI will average $80/bbl in 2022. However, even if oil averages $60/bbl, the Sweet 16 companies will be very profitable next year.
Last edited by dan_s on Tue Dec 07, 2021 1:53 pm, edited 1 time in total.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: The Sweet 16 is over-sold and should move UP into year-e

Post by dan_s »

Forbes: Shale oil wins back investors despite policymakers’ focus on climate change.
U.S. oil companies are raking in cash hand over fist, showing that the long-battered sector continues to be an attractive bet for investors. The S&P Oil and Gas Exploration and Production ETF (XOP) has surged recently by more than 75 percent compared to investment levels a year ago, making it the best performing subsector of the stock market. Generalist investors wary of the U.S. exploration and production (E&P) sector before the pandemic due to its reputation for capital destruction and mounting environmental, social and governance (ESG) concerns have found a bona fide cash machine on the other side. According to analysts at Wells Fargo, the robust oil and gas prices, capital discipline, and embrace of the ESG challenge by oil and gas producers mean the sector could enter a new “supercycle” in 2022, according to analysts at Wells Fargo.
Dan Steffens
Energy Prospectus Group
Fraser921
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Joined: Mon Mar 22, 2021 11:48 am

Re: The Sweet 16 is over-sold and should move UP into year-e

Post by Fraser921 »

Nice call!

You are not allowed to go on vacations anymore! (Unless you take us)
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: The Sweet 16 is over-sold and should move UP into year-e

Post by dan_s »

The energy consultancy Rystad Energy analyzed the third-quarter performance of 21 publicly-traded shale E&Ps that collectively account for 40 percent of U.S. production. They found records in most key financial metrics, including net income ($5.3 billion), EBITDA or cash flow ($16.3 billion), and most importantly, free cash flow ($5.6 billion) – or the amount of cash flow left after capital expenditures.

Bank of America thinks Brent could hit $120 a barrel by next June, while Goldman Sachs continues to believe that $90 oil is right around the corner despite the recent coordinated release of strategic oil stockpiles by several consumer nations led by the U.S. and China. < My guess is that China is just playing Biden and they will not release a single barrel from their SPR. They will just watch while Biden weakens our national security.
Dan Steffens
Energy Prospectus Group
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