Raymond James Oil Price Forecast - Revised on Oct 14

[dan_s]

Raymond James updates their oil price forecast at the beginning of each quarter.

In our last oil update, we detailed why we expect global petroleum inventories to draw by a very bullish 1.0 million bpd in 2019 and 300,000 bpd in 2020, with inventories (on a days-of-consumption basis) set to fall to unprecedentedly low levels in 2020. Since then, there have been significant (both bearish and bullish) changes to the key variables impacting our oil model. Our updated model now has global oil inventories falling 900,000 bpd in 2019 and another 700,000 bpd in 2020, followed by a balanced market in 2021. This still drives global "days of consumption" to well below historical levels in the coming quarters. In this week's "Stat", we will walk through these key oil equation changes and adjust our oil price deck to account for recent price movements.

Specifically, we will detail why we now think that
1) U.S. oil supply growth will be meaningfully lower (almost a million bpd) than consensus expectations,
2) global oil demand will be modestly lower than we previously thought (due largely to an ugly 2Q demand performance),
3) IMO 2020 will have less of an impact than we thought a year ago, and
4) 2H19 supplies from Saudi Arabia will likely be down by about 150 million bbls as a result of the damage from the Iranian attack.

Even though the sum of these supply/demand changes actually leaves our supply/demand balance more bullish than it was in July, we are lowering our 2020 oil price estimates to accommodate the recent bearish price action and overall oil market pessimism. Even though we are lowering our oil price estimates, it is important to note that our new 2020 forecasts are 30% to 40% ABOVE the current futures strip, while our long-term price assumptions are nearly 50% ABOVE the strip.
Our new 2020 WTI forecast decreases from $92.50/bbl to $70/bbl, while our 2021 and beyond forecast remains at $75/bbl.
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All of my forecast/valuation models assume $60/bbl WTI for all future periods. In addition to supply/demand tightness, I think there should be a much higher geopolitical risk premium when there is none today. The U.S. vs China Trade War continues to be #1 on the long list of "noise" that's keeping a lid on oil prices. - Dan

[dan_s]

Final point from RJ is worth noting.

"To be crystal-clear, the central reason why are lowering our 2020 price forecast is overwhelmingly negative oil market sentiment that is
being reinforced by algorithm "quant" funds using oil as a lever. Fighting the proverbial "tape" is never easy, and this is truly one of those
times. Because of how negative sentiment regarding oil demand currently is, the oil market seems to be ignoring all of the bullish supply-side
variables that we have pointed out above. Case in point: oil prices are currently lower than they were before the attack on Saudi revealed the
vulnerability of Saudi supply. While common sense would suggest that both supply and demand matter in any commodity market, for the time
being oil demand is all that seems to matter. As such, it just would not be prudent for us to continue forecasting $100 Brent in 2020 - even though
the underlying supply/demand fundamentals would theoretically support such a price level. For the long-term, our forecasts remain unchanged
at $75 and $80 for WTI and Brent, respectively.
Conclusion: We are lowering our 2020 oil price forecast, but remain much more bullish than consensus and the long-term oil futures strip."
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As I have posted here many times and highlighted in my podcast, I believe the "Right Price" for oil is $65-$75 per barrel for WTI. If you want to read the full RJ report on how they arrive at their new oil price forecast, send me an email and I will forward it to you. dmsteffens@comcast.net

Our opening speaker on November 13 at The Hess Club will be a member of the Raymond James Energy Research Team.