Oil Price Forecast - Dec 19

[dan_s]

From 22V Research 12-19-2024

There are three key messages to take away from this week’s U.S. oil data from the EIA (for week ending Dec 13).

First, U.S. crude inventories are low. Crude stocks in Cushing, Oklahoma (the delivery point to settle the NYM WTI crude oil futures contract) are at 23.0 million barrels. This puts them below 30% of local storage capacity. As the chart above shows, the 30% line marks the threshold for a low stocks environment that rations dwindling inventory through higher price. Last week the M1-M2 timespread in the NYM WTI crude oil futures curve averaged +37 cents per barrel. Last night that timespread closed at +56 cents. If the market remains in this low-stocks phase, we should not be surprised to see this backwardation expand by another +50 cents per barrel or more.

Second, U.S. petroleum exports are booming. They averaged 11.96 million b/d last week, the second highest volume ever. The mix was 7.065 million b/d in oil products and 4.895 million b/d in crude oil. The four-week moving average in U.S. crude exports is now at a fresh six-month high, signaling the market has definitively moved past the 3Q2024 hurricane disruptions (chart below).

Third, U.S. gasoline demand looks solid. Product supplied increased to 8.927 million b/d (+117 thousand b/d WoW). The four-week moving average is running +174 thousand b/d (+2.1%) above the same week a year ago. The startling message in the U.S. gasoline numbers continues to be: gasoline prices are so low relative to all other consumer prices, they are stimulating demand.

BOTTOM LINE: For most of the past two years, crude oil price formation has centered on the task of curbing marginal U.S. capex in oilfield production. As we have discussed previously, this is why the prompt WTI price has repeatedly gravitated to $68 but not far below. This is not random. Looking forward, the pieces are now in place for a product-demand-led market to play the guiding role in crude oil price formation in 2025. This will be a material change. It may sneak up on the equity investor as a sudden bid for the very unloved refiners. It also means incremental strength in product demand will translate to a price-pull on crudes. As such, we now have zero interest in shorting E&Ps at the right side of the cost curve, a reversal from one of our main themes of 2024. Our assessment of WTI crude oil price risk finds the most likely cash price is $72 at both the midyear 2025 and end-of-year 2025 marks. That is the baseline case. We would emphasize what is emerging in the right tail of the risk distribution. We now assess a one-in-four probability for WTI to price above $85 at midyear and above $90 by the end of the year. The risk of a downside scenario pushing cash WTI below $50 by yearend 2025 is not insignificant but has dropped to about 15%.
-----------------------------
MY TAKE: For my forecast/valuation models I am now using a WTI oil price of $75/bbl in 2025 and $80/bbl in 2026. However, I believe the "Right Price for WTI is currently somewhere in the $75 to $85 range AND I agree with the 22V analysis above that (barring a significant global recession) WTI is likely to move over $90/bbl in 2H 2025. I also believe that with a normal winter in the eastern half of the U.S. (off to a good start in December) combined with record LNG exports in Q1 2025, we will see HH natural gas prices over $4.00/MMBtu in 2H 2025.