BofA Equity Research Take on Global Oil Prices - Sept 30

[dan_s]

This note came out before the breaking news that China was going to start stockpiling oil again.

From BofA Global Research Team Sept 30 AM

This week's inventory data is something of a sideshow to the main event going on
outside of the US. Our initial reaction to a counter consensus crude build this week
(+4,6mm bbls vs consensus of 2.5mm bbl draw) was to enquire why would crude prices
turn positive on such a print? The short answer is the coming attraction that is winter
when European & International LNG prices are already making new highs, equivalent to
$180/bbl. It is no secret that natural gas inventories in Europe and low, while Asian LNG
demand has spiked in the post COVID recovery. It is also no secret that the biggest
onshore natural gas field in Europe (Groningen) is being ordered shut from 2022 while
the broader energy industry is attempting to pivot away from fossil fuels. But the
inconvenient truth is perhaps that all of the above has reconnected global energy
markets that are not quite ready for an aspirational energy transition, with the outcome
that 5yrs of underinvestment in traditional energy increasingly encouraged by regional
policies might just have hastened the risk of a supply / demand imbalance and the
similarities with the 2000-08 energy cycle highlighted in our 2020 report. < WTI traded up to $147/bbl in Q2 2008. Adjusted for inflation takes it close to $200US/bbl.

It is perhaps too early to consider the eventual outcome; but the speed has surprised, in
part the outcome of the high decline nature of US unconventional oil & gas production
that has displaced conventional supply. So what happens next? The first thing to note is
that global crude and product inventories have been pulling hard: critically, gasoil stocks
in the US & Europe stand at the lowest levels in 5yrs before any consideration of
incremental demand ahead of winter, from expected gas / oil switching. < This is where I remind EPG members that for over six months I have been telling you that declining OECD oil inventories has been and will continue to be the primary driving force for oil prices. OECD inventories are on a path to move below 27 Days of Supply within six months, which is lower than when WTI went to $147/bbl in 2008.

External
estimates suggests this could add ~1mm bpd to oil demand over the next 6 months –
lifting global oil demand to 100mm bpd. Near term, the relief valve may be Saudi / OPEC
and for as long as spare capacity is available it seems reasonable that prices will be
capped on the upside; at the same time seasonal shifts in demand will inevitably lead to
downturns as global inventories rebuild post winter. The upshot is that if the trading
range being effectively managed by OPEC+ is consistent with the last few months of
$60 - $80 Brent with the tailwind from a demand recovery still ahead, we suggest risks
to the value case for US oils discounting average $50 WTI remains skewed higher. We
remain constructive on the broader oil sector, with memories of 2003 underinvestment
cycle coming sharply into focus.