RJ's new Oil Price Forecast - August 2

[dan_s]

US RESEARCH PUBLISHED BY RAYMOND JAMES & ASSOCIATES
Energy Stat: Despite Delta Headwinds, Bullish Oil Outlook Remains

In case the recent oil price volatility worries some of our readers, all we can say is, nothing will ever shock us after the experience of 2020. Yes, spot pricing of WTI and Brent is off its recent highs, but it remains close to the highest levels since 2018. In the grand scheme of things, the oil market is doing just fine, thank you. In this context, today we are raising our price forecasts for the second half of 2021, full-year 2022, and long-term. Since our oil market update in March, there have been positive developments on both the supply and demand sides of the equation.

Supply Side: OPEC+ moved past its internal strife and agreed to methodically unwind the COVID-era production cuts (at a slower pace than we were modeling); Iran's presidential election ensured that the nuclear talks will move slowly; and upstream capital spending continues to show a remarkable degree of discipline around the world.

Demand Side: Vaccinations are enabling robust economic reopening in North America, China, and Europe, though this is partly offset by widespread lockdowns in Asia (ex-China) due to the spread of the Delta variant.

Putting everything together, our global oil model shows inventory draws averaging 1.6 and 0.3 million bpd in 2021 and 2022, respectively. In order to reach a balanced oil market by the end of 2022 (and beyond), pricing will need to be at sufficiently high levels to spur the industry to get out of its austerity mode, and the steep backwardated futures curve is in stark contrast to that. Our new price deck envisions WTI starting 2022 at $80/Bbl, averaging $75 for FY22, and $70 over the subsequent five years.

The BIG PICTURE:
> Global inventory draws averaging 1.6 million bpd in 2021 and 0.3 million bpd in 2022 under the bullish RJ price forecast.
> Oil demand recovery continues, though it is NOT evenly distributed: North America, China, and Europe are in good shape, whereas Asia (ex-China) is facing serious dislocation due to Delta.
> Even at today's higher strip, US production not nearly enough to balance the market.
> OPEC+ discipline cleans up inventories quicker in short run, long term we will need to pull every "lever" to balance the market next year.
> Global excess capacity drops to zero near the end of 2022. < The last time this happened WTI went to $147/bbl.
> Oil Inventories have returned to normalized levels in record time.
> OECD days of consumption set to plummet. < As I have been telling EPG members in my weekly podcasts all year, it is OECD "Days of Consumption" that is the primary driver of crude oil prices because OECD countries are this world's net consumers of energy.

[dan_s]

Despite a significant increase in the active drilling rig count and ~2,700 DUC well completions so far in 2021, US oil production has not risen from where it was in November, 2020.

"Looking back, rig counts have continued their linear climb since bottoming out in at 244 in August of last year, currently at 491, and we are
anticipating a slowing of growth in the rig count for the rest of the year as companies stick to their guidance plans for 2021. Specifically, at the
strip (summary image above right) we assume the rig count exits the year at 530 and averages 550 rigs in 2022. At these levels, our model forecasts
a 290 MBpd y/y decline for 2021 and a roughly flat production profile in 2022. All this to say, crude prices need to be significantly higher than the
current futures strip to incentivize more US production growth." - Raymond James 8-2-2021

If you'd like to see the full report from Raymond James, send me an email at dmsteffens@comcast.net