RJs New Oil Price Forecast - Jan 4

[dan_s]

As expected, Raymond James has increased their oil price forecast for 1H 2021. Below is the summary conclusion.
If you want to read the full report, send me an email: dmsteffens@comcast.net

Watch this video summary by RJ: https://www.kaltura.com/index.php/extwi ... ed/dynamic?

With the 2020 calamity in the rearview mirror, will 2021 be better? In a word, yes, but the speed and magnitude of oil price recovery will hinge on the pace at which large populations around the world will get access to Covid-19 vaccines. Supply presents fewer question marks: U.S. and other non-OPEC production is set to remain in decline - including a smaller contribution from long-lead-time projects - while OPEC+ output should rebound in parallel with demand. We forecast hefty inventory draws in both 2021 and 2022 – which, by definition, is bullish for prices. We forecast WTI ending 2021 at $65/Bbl, which implies an average of $57 for the year (20% above the futures strip), followed by an average of $65 in 2022 (40% above the strip), with Brent at a modest premium. For U.S. natural gas, the fall-off in associated gas supply translates into a 2021 cyclical peak averaging $3.25/Mcf (25% above the strip).

Having been predicting sector rotation back into energy for years now, and constantly being proven wrong, it is tempting to just give up... but, being the contrarians that we are, we think that giving up at the bottom would be the worst possible advice. In all our years/decades doing this, we have never seen the energy sector - setting aside clean tech/renewables as the obvious exception - as out of favor as it is currently. Even more to the point, the level of investor apathy vis-à-vis energy is the highest ever: simply put, plenty of investors no longer care about a sector that is currently 2.3% of S&P market cap. The combination of an overlooked sector, attractive valuations, and a commodity upturn should position energy to meaningfully outperform the broader market. All that being said, selectivity remains key. For example, the ESG investing trend, including a proliferation of climate funds and fossil fuel investments, is part of the backdrop to which the entire sector will need to adapt.

[dan_s]

The basis of RJ's much higher than the current WTI strip price forecast is that beginning this spring, U.S. and OECD petroleum inventories (crude oil and refined products) will be declining by over 2 million barrels per day EVEN UNDER A MODEST ECONOMIC RECOVERY MODEL. BTW over the last two weeks, U.S. petroleum inventories have declined by more than 20 million bbls.

In the real world, a steep decline to under 30 days of supply CANNOT HAPPEN because of the impact fuel shortages will have on many of our important supply chains. Think about what happens if there is a shortage of diesel when it is time to harvest crops.

Each time there has been a drop in OECD petroleum inventories below 30 days of supply the price of oil has increased. The previous two times that we saw under 28 days of supply WTI went to over $100/bbl.