Sweet 16 is over-sold and should move UP into year-end
Posted: Mon Dec 06, 2021 5:03 pm
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.
------------------
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.
------------------------
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.