Notes from RBC Capital - June 30

[dan_s]

Our view: Following a busy June conference season, energy investors are starting
to re-engage in the sector, which moved higher through the week despite oil being
more choppy. The early tenor on earning seems positively skewed and the move
higher in the broad market is providing some support. Macro oil concerns are less
pronounced, but promises from the Fed/ECB to continue rate hikes and relative
strength in China demand are still headwinds. Over the last week, oil-weighted
E&Ps gained 3.4% while gassier peers rose 5.0%. Large caps were up 3.3% while
SMid cap peers surged 5.4%. Overall, the XOP climbed 4.4%, with WTI oil up 0.4%
and HH natural gas up 2.8%.

Geopolitics, Oil, Natural Gas, Gold, Clean Energy and MENA Research
Earlier this week, we highlighted the potential risk to Russian oil exports in a serious
internal civil unrest scenario. Another wildcard is what happens in other commodity
producing countries where the Wagner Group operates. The next six weeks will
dictate the next six months. What do we mean? The physical market has been
sloppy all year, but July should (in theory) be tight. While front month natural gas
prices may be off the recent high, they gained steam over the course of June in
the direction of our price forecasts. We do think this sets up our remaining 2023
forecasts in a good spot. Our Q3 and Q4 2023 average middle scenario gold price
forecasts are $1848/oz and $1890/oz – and with gold having traded into the $1800’s
per ounce range intraday this morning, is that scenario reasserting itself? < Historical
relationship is that WTI should be trading at 1/20th the price of gold, $92 to $94 range.

Time to Buy Oil? Bring on the Stock Draws
• Show me: Most paper balances have been guiding toward strong stock draws
come 2H’23, but sloppy physical markets have negated the bullish tone. Truth be
told, paper balances are a necessity from a guidepost perspective, but are also
myriad in assumptions and inherent biases. There are caveats to paper balances,
but we see Q3 paper draws in the 2 mb/d range. Huge, but this oil market has
become a show me rather than a tell me type market.
• Now or Never?: Saudi production cuts, the return of 2+ mb/d of refinery capacity
and leading indicators of strong Chinese crude imports should all bode well for
a tighter physical market in July. We fear that market apathy and lack of risk
deployment will compound further if the global physical market does not tighten
in spite of the above-mentioned events.
• Pricing Outlook: We see WTI and Brent pricing averaging $76.75/bbl and $80.75/ bbl
through 2H’23. There is downside risk to our price forecast trajectory. If the
physical market tightening event does not materialize in July, we think this could
end up being a lost year for the oil market as risk remains sidelined with a dearth
of near term catalysts.
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MY TAKE: There is a lot of money waiting for proof that demand for oil exceeds supply (what many of the Wall Street Gang have been telling us would happen). Several big storage draws in a row should bring those investors back into the market. Plus, I think Q2 results will not be as bad as most people are expecting.