Oil Price Forecast - Sept 26

[dan_s]

From Raymond James 9-26-2019

Since the mid-year escalation of the U.S.-China trade war, oil prices have weakened due to the negative macro sentiment, with day-to-day choppiness dominated by demand-related fears. Earlier in the month, the stunning oil supply disruption in Saudi highlighted the vulnerability of supply to geopolitical risk, spurring a record-sized oil market rally early last week, albeit followed by a pullback towards pre attack levels. Even setting aside the Saudi situation, the fundamentally bullish supply side of the equation is largely being overlooked: the larger U.S. producers are exhibiting restraint in capital allocation, and U.S. well productivity improvements are slowing down; OPEC plus Russia’s production cuts – in place through March 2020 – are noticeably contributing to inventory draws; U.S. sanctions against Iran continue to be impactful; and IMO 2020 is looming three months from now. The 12-month futures strip ($55.02/Bbl for WTI and $59.96/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our 2019 forecast is $62.50 WTI/$71.00 Brent and the 2020 forecast is $92.50 WTI/$100 Brent. There remain several key question marks, such as: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones, most notably a potential scenario of military escalation vis-à-vis Iran and 2) on the bearish side, visible indications of global macro slowdown and resulting read-through for oil demand.
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RJ is still forecasting WTI will top $75/bbl by year-end. They continue to believe that FEAR of a global recession is keeping a lid on oil prices AND that Wall Street is ignoring the supply side issues. They also believe (as I do) that U.S. oil production growth has peaked. EIA will announce July actual oil production next week (on Sept 30) and it will be much lower than June production. Since April, U.S. oil production was down in May and June. EIA has over-stated U.S. oil production in their weekly reports all year and they continue to forecast lofty increases in each month's STEO report, which BTW has been wrong EACH MONTH.

My forecast models assume $60/bbl WTI in all future periods. Obviously, if there is an escalation of military strikes in the Middle East or any other non-planned supply outage, the oil price can go up very fast. Supply / Demand for oil is much tighter than the oil price is telling us.