Oil Price Forecast - August 31

[dan_s]

On June 4, 2018 Raymond James updated their oil price forecast for 2H2018 to 2020. On July 30, 2018 RJ reissued their forecast with no change for 2H2018 & 2019, but they raised their forecast by $10/bbl for 2020 (to $75/bbl) with the headline "Higher Prices are Here to Stay".

RJ forecast that WTI would average $70/bbl in Q3 and Q4 of this year. Keep in mind that on June 4th they had no idea how serious President Trump would be with Iran.
On July 1st WTI opened at $74.15 and on August 31st it closed at $69.80. WTI Stayed over $70/bbl until mid-July and looking a chart the shaded area above $70 and below $70 appear to be about the same. My guess is that for the first two months of Q3 the average is around $69/bbl. My guess is that the situations in Iran and Venezuela will push oil higher in September, so RJ's forecast definitely looks good.

Reuters:
> Oil prices ended the month nearly 2% higher as bets on renewed global supply shortage as U.S. sanctions on Iran's crude exports are expected to reduce crude from market, underpinning higher crude prices.
> "Press reports indicate that Iranian crude oil and condensate exports in August are poised to drop below 2.25 million barrels a day – marking three straight monthly declines, a 600,000 bpd drop versus April and helping crystallize the risk that US sanctions squeeze global oil supply placing upward pressure on international prices," Bank of American Merrill Lynch said in note to clients.
> Both WTI and Brent crude are expected to gain on a potential slump in Iranian exports, although gains in WTI prices will be limited as the refinery maintenance season is set to get underway.
"An active maintenance season in the US Mid-Continent may prevent the WTI benchmark increasing," according to Bank of American Merrill Lynch. Maintenance season tends to halt refinery activity, slowing demand for crude stockpiles used as inputs in the production of product inventories like gasoline.
> Oil prices were also helped earlier in the week by an EIA report showing crude oil stockpiles fell much more than expected.

My Takes:
> Very low inventories of distillates (diesel and home heating oil) will keep the refineries busy, so I don't see the big drop in refinery throughput that normally comes in September.
> Venezuela is much worse than people realize. It is a human tragedy and a perfect example of how Socialism destroys a country; even one with the world's largest oil reserves.
> The rapid drop in Iranian exports has surprised me. In RJ's June 6 forecast, they only estimated a drop of 200,000 barrels per day in Iranian exports.

From the Raymond James July 30 Update:
What about wildcards?
There are numerous supply-side wildcards that need to be watched – mostly, though not exclusively, in the realm of geopolitical risk.
As the civil war ebbs and flows in Libya, and militant activity remains an issue in Nigeria, production is volatile from month to month
– and even day to day! With regard to Iran, we are conservatively modeling only a slight minor impact from the reinstatement of
U.S. secondary sanctions. Given that Iranian exports could conceivably fall by 1 million bpd, this is a very, very bullish wildcard. Over
the long-term, Venezuela could go either way – bullish or bearish – in the sense that sudden regime change could result in a nearterm
production collapse but ultimately lead to an improved environment for the oil industry and thus stabilizing production or even
growth. Clearly, Venezuela will continue to be a near-term bullish driver of oil prices as supply continues to fall under Maduro.

Finally, there are the “unknown unknowns” – situations that might emerge suddenly out of the proverbial left field. Could the
current hostilities between the West and the Kremlin lead to an energy embargo against Russia? Could the new Colombian
president’s hardline policy lead to a revival of militant activity, including attacks on pipelines? Could something like the Arab Spring
occur in any of the wealthy Gulf countries? Could anti-fracking policies be introduced in some of the key U.S. oil-producing states,
along the lines of Colorado’s referendum attempt from 2016?

On the demand side, there is always macroeconomic risk in the background. The business cycle has emphatically not been repealed,
and there will be recessions in the future – we just cannot predict the timing and magnitude. In 2016, for example, the Brexit
referendum had caused fears of European economic troubles – but, in fact, Europe has been in generally good shape since then.
Perennial concerns about China’s economic imbalances may eventually come to fruition. Perhaps the Federal Reserve will overshoot
in its rate hikes. A more specific issue influencing oil demand is demand displacement from electric vehicles – a theme that has been
overhyped historically, at least over investable timeframes for the vast majority of our readers. Even with our assumption of a more
than 10x increase in global light-duty EV sales between 2017 and 2025, the oil demand impact of EVs (including electric buses) will
remain irrelevantly small until the middle of the next decade. We often see market speculation about when global oil demand might
peak. While presumably nothing grows forever, we are confident in predicting that the peak demand scenario will not materialize
until after 2025, and more likely after 2030.

IMO 2020 is the new law that says all ships must use low sulfur fuels beginning in 2020 (just 16 months from now).
Conclusion: IMO “shock” in 2020, U.S. base declines, and non-OPEC headwinds lead us to raise our long-term oil price deck. The
most immediate catalyst for today’s increase in our long-term oil price forecast is the impact of the IMO’s new fuel regulations,
having the effect of essentially erasing 1.5 million bpd of global oil supply in 2020. In addition, there are two structural headwinds
for global oil supply that will become increasingly visible beyond 2020. First, the steepening base decline rates across U.S. resource
plays will increasingly require a higher rig count – and thus higher industry cash flows – to counteract them. Second, the global oil
industry’s unusual degree of capital discipline is resulting in a sharp reduction of long-lead-time project approvals, likely leading to
non-OPEC ex-U.S. supply posting accelerating declines after 2020. Putting all this together, our new 2020 oil price forecast is $75
WTI and $80 Brent, which is materially above Street consensus and the futures curve. Similarly, and for the second time this year, we
are raising our long-term (2021+) price deck by $5, to $70 WTI and $75 Brent.

Art Berman (who I don't always agree with, but a very sharp guy) wrote a detailed article about how the Williston Basin (Bakken and Three Forks) will probably go on steady decline very soon because most of the Tier One leasehold has been drilled. Send me an email if you would like to read it (dmsteffens@comcast.net). The bigger point is that every oilfield ever discovered eventually peaks and goes on decline shortly after about 50% of the Tier One acreage is fully developed. The shale plays are not an exception to this rule, although they still may have several years to go before peaking because horizontal drilling technology is still getting better and major oilfield services firms are still "tweaking" the completion methods (although it can be said that the "Monster Fracs" are just speeding up depletion). Art and I definitely agree that all the forecasts of the U.S. becoming "Energy Independent" are HOGWASH. It won't happen in my lifetime unless demand goes WAY DOWN. U.S. and global demand for oil will continue to increase until at least 2030, IMHO of course.