Oil Price Forecast very bullish for the Sweet 16 - June 18

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

Oil Price Forecast very bullish for the Sweet 16 - June 18

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I have been following Martijn Rats analysis of the global oil market for many years. He is one of the most conservative members of the Wall Street Gang, so his forecast of Brent oil averaging $75-$80 per bbl from now until mid-2022 should be considered a threshold for us. Other energy sector analsts are forecasting up to $100/bbl within a year. For now, my Sweet 16 valuations are still based on WTI averaging $65/bbl after 2021. I will be evaluating the need to raise my oil, gas and NGL price assumptions when the Sweet 16 report Q2 results in late July and early August. - Dan
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Note received from my friends at Morgan Stanley on June 18, 2021

Morgan Stanley's Global Oil Strategist Martijn Rats highlights that oil prices have disconnected from the marginal
cost of supply. Although activity levels are recovering, he points out that the horizontal oil-directed rig
count in the US is already 112 rigs short compared to the 2016 rig count recovery. The increase in frac
spreads seems to have slowed, far fewer new wells are being drilled than are starting production, and by
now, he believes the industry is even drawing down on 'young DUCs' which is unusual during a
recovery. If both public integrated oil & gas companies and US shale companies have muted-to-non
existent responses to high oil prices, Martijn thinks oil markets increasingly look tighter-for-longer,
giving OPEC further market clout even now.
He highlights that OPEC has substantial spare capacity,
but with a receding risk of a sharp non-OPEC supply response, it may decide to unwind this only slowly.
In that case, Martijn notes that oil prices would need to rise to the level where demand destruction kicks
in.
He thinks this is hard to estimate, but historical price ranges for diesel delivered in Asia expressed in
local currency may provide a guide. Martijn raises his forecast for Brent to $75-80/bbl until mid-2022.
Dan Steffens
Energy Prospectus Group
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