I had hope to be able to post the slides that RJ spoke from today, but this is what they told me:
Since this isn’t published research (such as a note), the slides can not be posted online due to compliance issues.
Sorry about that.
Regards,
Muhammed Ghulam, Senior Assoicate
-----------------------------
I will go through the slides and give you my thoughts later today.
Raymond James @ EPG Luncheon July 16
Raymond James @ EPG Luncheon July 16
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Raymond James @ EPG Luncheon July 16
Here are my notes from the Raymond James presentation:
Overview:
RJ is bullish on oil prices relative to the futures strip. Actual WTI price should be 10% to 15% above LT NYMEX Strip.
Upstream companies they follow will generate strong cash flow at $65 WTI (My models agree)
U.S oil supply will only grow to meet demand if WTI stays above $65
U.S natural gas prices will struggle because of rising demand. (I agree, but think there is going to be a very tight U.S. gas market heading into this coming winter, so a brief “price war” is becoming more likely each week.)
Why does the NYMEX strip show crude oil prices so low in the future? FEAR
RJ thinks the FEARs are over-stated and so do I:
1. U.S. oil supply will overwhelm the global oil market. NO WAY U.S. can supply the world with oil, we will be a net importer of oil for a long time.
2. OPEC+ coalition will flood the market. OPEC+ cannot do it because so many cartel members are on decline. Only a few in OPEC have any remaining production capacity and what they do have is overstated by the cartel. Saudi Arabia does not have 2 million barrels of remaining production capacity.
3. Lack of non-U.S. and non-OPEC declines.
4. Weak demand
Outside of the U.S., there is no oil supply growth
Global demand is growing by ~1.5 million barrels per day and Non-U.S. + Non-OPEC supply is declining by ~0.5 million barrels per day. The U.S. cannot keep growing oil production at this pace (or even close to it). Growth in the Permian Basin will slow from mid-2018 through 2019. At $65 oil, 2018 will be the PEAK year of oil production growth in the U.S.
U.S. Active Rig Count must grow each year because depletion rate is increasing each year as we layer on more and more high decline rate horizontal wells.
U.S. well productivity gains (over 30% each year 2011 to 2015) will be ~8% in 2018 and ~5% in 2019. This happens because Tier One leasehold is drilled first, lateral lengths are near the limits, proppant intensity is peaking and there is more well communication in highly drilled areas.
Russia is not the threat many on Wall Street believe that it is. They “drained the tanks” to artificially jack up production before the Vienna Agreement. Russian growth will be ~125,000 BOPD per year.
RJ’s base assumption is that Trump’s sanctions against Iran will take ~250,000 BOPD off the market. The speaker said this is a wildcard and the actual amount could be a lot higher.
< My opinion is that Trump is serious about Iran and the sanctions will take 1,000,000 BOPD off the market in early 2019.
Libya is another wildcard. RJs base assumption is that Libyan production holds at 1,000,000 BOPD. My view of Libya is that it is a failed state much like Venezuela and the country is basically run by gangs.
Saudi Arabia: RJ and I agree that the Kingdom’s remaining production capacity of 2 million barrels per day is a myth. RJ’s base model is that Saudi Arabia’s actual production will average 10.3 million barrels per day thru 2020. Short-term increase in exports are the result of draining storage tanks.
Venezuela is a “Failed State”: RJ’s base assumption is the their production goes from ~1.3 MMBOPD in Q2 2018 to ~0.9 MMBOPD in Q4 2019. I’ve had some smart people tell me that it could go to zero if there is a military coup and the chances of that happening goes up each day.
Summary of OPEC: Production growth = zero from Q1 2018 to 2019
Global Capex declines have pushed Non-U.S. supply growth projects way out. Outside of small growth in Brazil, the rest of the world’s oil production will be flat to down through 2022 and there is not much chance of anything changing this outlook.
Oil Demand: As I have told you many times in my podcasts, RJ put up a slide that shows how bad IEA demand forecasts for annual demand growth have been. From 2009 to 2015 IEA was way low each year and had to revise up their demand “forecasts” to actuals by an average of 490,000 BOPD.
1. More people + more SUVs = more demand for transportation fuels
2. Miles driven goes up each year
3. Chinese SUV sales way up
4. India has surprised to the upside year-after-year
5. EVs are not a “Slam Dunk”, primarily because they cost too much and their limited range does not suit most drivers. No significant impact on oil demand until AT LEAST 2025.
RJ sees steep decline in U.S. crude oil inventories through December, 2018.
OECD Oil Inventories will be lower on days of supply in 2019 than they were in 2013-2014 when oil was over $100/bbl. Global supply will not balance to demand until 2020. IMO this is wishful thinking.
RJ’s Official WTI Oil Price Forecast:
2018
Q1A = $62.89
Q2A = $67.97
Q3E = $70.00
Q4E = $70.00
2019
Q1E = $70.00
Q2E = $65.00
Q3E = $65.00
Q4E = $60.00
LT RJ thinks WTI will average $65.00
MY TAKE: Oil Price Cycles always overshoot the “Right Price” and we will see $100 WTI in early 2019, primarily because I think Trump is going to hit Iran very hard and I think Venezuela is MUCH WORSE than anyone can imagine.
Overview:
RJ is bullish on oil prices relative to the futures strip. Actual WTI price should be 10% to 15% above LT NYMEX Strip.
Upstream companies they follow will generate strong cash flow at $65 WTI (My models agree)
U.S oil supply will only grow to meet demand if WTI stays above $65
U.S natural gas prices will struggle because of rising demand. (I agree, but think there is going to be a very tight U.S. gas market heading into this coming winter, so a brief “price war” is becoming more likely each week.)
Why does the NYMEX strip show crude oil prices so low in the future? FEAR
RJ thinks the FEARs are over-stated and so do I:
1. U.S. oil supply will overwhelm the global oil market. NO WAY U.S. can supply the world with oil, we will be a net importer of oil for a long time.
2. OPEC+ coalition will flood the market. OPEC+ cannot do it because so many cartel members are on decline. Only a few in OPEC have any remaining production capacity and what they do have is overstated by the cartel. Saudi Arabia does not have 2 million barrels of remaining production capacity.
3. Lack of non-U.S. and non-OPEC declines.
4. Weak demand
Outside of the U.S., there is no oil supply growth
Global demand is growing by ~1.5 million barrels per day and Non-U.S. + Non-OPEC supply is declining by ~0.5 million barrels per day. The U.S. cannot keep growing oil production at this pace (or even close to it). Growth in the Permian Basin will slow from mid-2018 through 2019. At $65 oil, 2018 will be the PEAK year of oil production growth in the U.S.
U.S. Active Rig Count must grow each year because depletion rate is increasing each year as we layer on more and more high decline rate horizontal wells.
U.S. well productivity gains (over 30% each year 2011 to 2015) will be ~8% in 2018 and ~5% in 2019. This happens because Tier One leasehold is drilled first, lateral lengths are near the limits, proppant intensity is peaking and there is more well communication in highly drilled areas.
Russia is not the threat many on Wall Street believe that it is. They “drained the tanks” to artificially jack up production before the Vienna Agreement. Russian growth will be ~125,000 BOPD per year.
RJ’s base assumption is that Trump’s sanctions against Iran will take ~250,000 BOPD off the market. The speaker said this is a wildcard and the actual amount could be a lot higher.
< My opinion is that Trump is serious about Iran and the sanctions will take 1,000,000 BOPD off the market in early 2019.
Libya is another wildcard. RJs base assumption is that Libyan production holds at 1,000,000 BOPD. My view of Libya is that it is a failed state much like Venezuela and the country is basically run by gangs.
Saudi Arabia: RJ and I agree that the Kingdom’s remaining production capacity of 2 million barrels per day is a myth. RJ’s base model is that Saudi Arabia’s actual production will average 10.3 million barrels per day thru 2020. Short-term increase in exports are the result of draining storage tanks.
Venezuela is a “Failed State”: RJ’s base assumption is the their production goes from ~1.3 MMBOPD in Q2 2018 to ~0.9 MMBOPD in Q4 2019. I’ve had some smart people tell me that it could go to zero if there is a military coup and the chances of that happening goes up each day.
Summary of OPEC: Production growth = zero from Q1 2018 to 2019
Global Capex declines have pushed Non-U.S. supply growth projects way out. Outside of small growth in Brazil, the rest of the world’s oil production will be flat to down through 2022 and there is not much chance of anything changing this outlook.
Oil Demand: As I have told you many times in my podcasts, RJ put up a slide that shows how bad IEA demand forecasts for annual demand growth have been. From 2009 to 2015 IEA was way low each year and had to revise up their demand “forecasts” to actuals by an average of 490,000 BOPD.
1. More people + more SUVs = more demand for transportation fuels
2. Miles driven goes up each year
3. Chinese SUV sales way up
4. India has surprised to the upside year-after-year
5. EVs are not a “Slam Dunk”, primarily because they cost too much and their limited range does not suit most drivers. No significant impact on oil demand until AT LEAST 2025.
RJ sees steep decline in U.S. crude oil inventories through December, 2018.
OECD Oil Inventories will be lower on days of supply in 2019 than they were in 2013-2014 when oil was over $100/bbl. Global supply will not balance to demand until 2020. IMO this is wishful thinking.
RJ’s Official WTI Oil Price Forecast:
2018
Q1A = $62.89
Q2A = $67.97
Q3E = $70.00
Q4E = $70.00
2019
Q1E = $70.00
Q2E = $65.00
Q3E = $65.00
Q4E = $60.00
LT RJ thinks WTI will average $65.00
MY TAKE: Oil Price Cycles always overshoot the “Right Price” and we will see $100 WTI in early 2019, primarily because I think Trump is going to hit Iran very hard and I think Venezuela is MUCH WORSE than anyone can imagine.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group