BofA Global Oil Market Outlook - Oct 28

[dan_s]

2 steps forward … one step back: but oil is still >$80
In our recent valuation framework report we discussed the idea of a strategic pause in
sector exposure on the risk that a series of transitory events was artificially inflating oil
at the front of the curve, before the full court press of market rebalancing plays out
(higher demand, reduced spare capacity). Add our technical team’s concern that Brent
screened as over extended short term, right on queue oil prices have taken a breather –
prompted by a series of soft headlines led by Chinese efforts to cap coal prices and
headlines about Iran returning to the negotiating table. With that said buried under the
big ‘macro’ themes was bullish ‘micro’ news: South Sudan, Libya, and Nigeria all had
export cuts to the tune of 400+ mbpd and Saudi cautioning that accelerating the return
of production would merely hasten a reduction in spare production capacity, amidst what
it sees increasingly as a global supply outlook at risk of underinvestment. On balance we
attributed the pullback as once again led by technical factors signaling long paper
market names to take profits – but aside from elevated prices at the front of the curve
we suggest the supportive medium term outlook for the broader complex remains in
place – but softness at the front of the curve nevertheless leaves some of the higher
beta names at risk of a more exaggerated pullback – as seen today. Then again, oil prices
are still above $80 – and street estimates, ultimately need to move up leaving our
expectations for sector outlook still one as two steps forward, one step back.

EIA’s exit ‘22 prod’n outlook cut 500,000 bpd since March
The EIA’s latest Short Term Energy Outlook, shows its US oil production forecast has
been steadily revised lower in nearly every publication since Spring: recall we examined
this issue in our OIM #558 and addressed it with the EIA directly. The issue then, as now
is that we believe the legacy price / activity regression used by the EIA entirely misses
the change in business model of US E&P’s. In its latest publication, its expectations for
YE22 exit oil production is now lower by 500,000 bpd vs just 6 months ago with strip
prices ~$20 higher for FY22 than it was then. For now the EIA still expects exit growth
of 790mbd bpd between 4Q21 & 4Q22; in our view the risks to this estimate are still
skewed lower as the inertia from working down drilled, uncompleted well inventory
collides with a necessary ramp up in rigs simply to offset the loss of DUC inventory.
While private E&P’s have moved quickly to fill the activity gap left by private cos, we
continue to believe with the interplay of accelerating declines, the net is still a lower
level of exit growth vs the EIA’s current outlook. Don’t take our word for it. In the EIA’s
own words from its Sept Drilling Productivity Report (DPR) it states that ‘the decline in
DUCs in most major U.S. onshore oil-producing regions …. reflects more well completions
and at the same time, less new well drilling activity. The completion of more wells is
increasing oil production in the Permian region, but the completions are reducing the DUC
inventories, which could limit oil production growth in the United States in the coming
months.
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As I have mentioned in several of my podcasts, since early 2021 the US has been completing ~250 more wells per month than were being drilled. These wells were in the Drilled UnCompleted (DUC) inventory at the end of 2022. The best DUCs were completed first. The DUC inventory is now back to normal, so well completions going forward s/b equal to the number of wells being drilled. The US oil production won't go up unless more rigs are put to work. That is not going to happen in the winter, when drilling activity always slows down.