Energy Prospectus

April 23, 2018

Energy Stat: Global Oil Inventories Keep Falling - Raising 2018, 2019, and Long-Term Price Forecast

Summary

Our global oil supply/demand model has increasingly pointed to the need for oil prices to move higher in order to avoid a starkly undersupplied oil market in late 2018 and 2019. Even when making some deliberately conservative (bearish) assumptions, our latest model indicates that global inventories will draw by a massive 800,000 bpd in 2018 (even with strong U.S. supply growth and high-$60s oil prices).

After a strong start to the year in oil prices (and a much more bullish than consensus view on oil prices for the last few years), we are now raising our full-year 2018 forecast by $3/Bbl, to $68/Bbl WTI and $73/Bbl Brent. With the current abnormally high level of inventory draws, OECD inventories are set to fall to 27 days of consumption (10% below the long-term average) by the end of 2018, and they should remain below normal through 2020. Based on this, we are raising our 2019 forecast by $10, to $70 WTI and $75 Brent.

Over a long-term timeframe (2020+), we now believe that rising base declines across U.S. resource plays will result in a slowdown in U.S. supply growth even if oil prices remain in the $65 range. Due to this, we are raising our long-term forecast by $5, to $65 WTI and $70 Brent, and maintain an upward bias to even this higher forecast.

Phil Flynn at 8AM ET 4/23/2018

Making collusion great again. OPEC says that their recent move to cut oil production had nothing to do with greed, but they acted with a “noble goal” of rescuing the global oil market. These comments came from the UAE energy minister Suhail Al Mazrouei who said it’s not about raising prices it is about the noble endeavor of working to reduce over supply. Well in a way he does have a point. The glut over supply did play havoc with oil companies and oil investors. Of course one must note that it was OPEC’s idea to try to flood the market to force U.S. shale producers out of business. That helped add to the glut of supply. That glut also created a dangerous false assumption that oil prices would stay lower for longer and that led to a dangerous amount of underinvestment in the sector. Now the market is starting to feel the impact from the trillion dollars of capital spending cuts that we have seen in the past.
Now, the world is looking to shale to supply most of the production growth but as it is widely being reported, shale bottlenecks are now hampering output and U.S. refiners want more heavy oil and less shale. Reuters reported that U.S. drilling activity is now at its highest in three years and a rising weekly rig count points to further increases in U.S. crude production, which is already up by a quarter since mid-2016 to a record 10.54 million barrels per day (bpd). Yet, the Wall Street Journal reported that “Permian producers are starting to encounter congested pipelines and shortages of materials and workers—bottlenecks that have caused some investors to sour on the region. Some energy executives question whether sky-high forecasts are achievable.”
The Journals says that “While production is expected to continue rising, the Permian’s stumbles could ripple out to the global oil market at a time when OPEC has curtailed output and many companies have cut back on megaprojects. That could become a source of volatility that propels oil prices elsewhere higher.” This is something we have been writing about for some time. We also have been writing about oil refiners having their fill of light shale oil. Morgan Stanley agrees. Morgan says that “our thesis is that the U.S. refining system is close to being maxed-out on the amount of shale oil it can process.” In other words we may need to dump shale oil overseas to continue to find a market.
Geopolitical risks abound as well. The big May 12 decision by the Trump Administration to decide whether it will leave a nuclear deal with Iran and hit them with more sanctions. Yet, we also have Syria and Yemen that is on the back burner as well as heightening tensions between Israel and Iran.
Oil is pulling back a bit today on reports by private forecasters of a build in Cushing Oklahoma supply. Long term oil is beyond the demand curve. Strong growth will keep the long-term trend higher as the oil super cycle continues.
Use weakness to put on long term bullish positions. Many of those long term bullish positions put on a year ago are doing great. We were early to recognize this bull run and we are only in the beginning stages. We were bullish before being bullish was cool.