Energy Prospectus

This will raise the Sweet 16 valuations: Wells Fargo has raised the oil prices that they are using to value upstream companies. Keep in mind that Wall Street leans to toward conservative commodity prices in stock valuations. These prices are probable the low end of what they actually think oil prices will be.

Here are their new oil price forecasts. These are average prices for the full year.
2018 = $68.27 < Actual prices for 1H and $70 for 2H
2019 = $73.00
2020 = $69.00
2021 = $68.00

Wells Fargo Industry Energy Integrated Oil & Gas 10/8/2018

Oil Macro: Oil Price Rally Should Continue

Key Takeaway. Oil has had a good year with prices returning to 2014 levels in the past few weeks. Lower inventories, reduced spare capacity, near record production from Saudi Arabia, logistics bottlenecks across North America and IMO 2020 are all contributing factors to oil price strength. In our view, recent inventory data implies balanced market conditions, but with Venezuela production likely to continue sliding lower, sanctions on Iran likely to throttle production into early 2019 at least and Saudi Arabia near historical peak volumes, OPEC's ability to make up for any future disruptions appears limited. We believe this and reasonable global demand growth are the key reasons for oil's price strength. Consistent with our prior update, we expect 2019 to be another year of undersupply, which along with IMO 2020 should support higher oil prices into H2 2019. By 2020, we see a more balanced market with an oversupplied market possible in 2021. Thus we see the highest prices as likely during mid-2019. < IMO this assumes that the U.S. dispute with Iran is resolved by the end of 2019.

Demand Growth Less Likely to Surprise to the Upside. Higher oil prices (typically negative for demand growth) and a decelerating pace of global economic growth outlook (Wells Fargo Economic outlook) should combine to restrain oil demand growth through 2021 and limit any upside surprises in our view. A stronger dollar could pose a further risk to oil demand growth. Through 2021 we see annual demand growth as more likely to remain below 1.5%. Consistent with our prior update, we have not included any potential negative impacts from the nascent ''trade wars'' in our forecast.

Supply Shortfall Still Appears Likely in 2019. Core OPEC's recent efforts to increase production have offset much of the quicker than expected Iranian declines, but in our view will not be sufficient to maintain an evenly supplied global crude market. In our view, this is clearly supportive of higher oil prices now and throughout 2019. Supply of light/sweet crudes should also get a lift in H2 2019 as the IMO 2020 directive is implemented. As Lower 48 bottlenecks are corrected in H2 2019 and H1 2020, we expect U.S. production growth to remain impressive through 2021. Based on higher oil prices, we expect reinvestment to be robust through our forecast period. Thus we expect production growth to begin to catch up to demand growth in 2020. By 2021, we currently predict supply to outpace demand growth, which is consistent with our price deck.

We do not expect sanction on Iran to be removed (anytime soon) or for Venezuela to reverse its decline.

Lower 48 Crude Diffs Updated. We have updated our Lower 48 crude differentials forecast to take into account recent developments including production expectations, pipeline in service dates and anticipated conversions. Debottlenecking of the pipeline system should narrow WTI-Midland differentials in H2 2019 and throughout 2020 in our view.
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MY TAKE: As Wall Street gains more confidence that oil prices will remain "higher for longer", hedge funds will rotate money into the oil & gas sector. Keep in mind that most of the Sweet 16 have low oil price hedges that will expire at the end of 2018, so revenues will get a boost if oil prices just hold steady at the current levels. Q1 2019 gas prices are going to help get next year off to a very good start. Companies with production outside of the Permian Basin will get much better oil, gas and NGL prices. This is especially true for the Eagle Ford companies.

Per new report by the International Energy Agency (IEA): Petrochemicals are set to account for more than a third of the growth in world oil demand to 2030, and nearly half the growth to 2050, adding nearly 7 million barrels of oil a day by then. They are also poised to consume an additional 56 billion cubic metres (bcm) of natural gas by 2030, and 83 bcm by 2050.

From Reuters
Iran’s crude exports fell further in the first week of October, according to tanker data and an industry source, taking a major hit from U.S. sanctions and throwing a challenge to other OPEC oil producers as they seek to cover the shortfall.

The Islamic Republic exported 1.1 million barrels per day (bpd) of crude in that seven-day period, Refinitiv Eikon data showed. An industry source who also tracks exports said October shipments were so far below 1 million bpd. That’s down from at least 2.5 million bpd in April, before President Donald Trump in May withdrew the United States from a 2015 nuclear deal with Iran and reimposed sanctions. The figure also marks a further fall from 1.6 million bpd in September.

Tanker schedules are often adjusted and exports can vary week by week. The early October figures add to signs, however, that Iranian exports are falling more steeply than expected, stretching the ability of Saudi Arabia, non-OPEC Russia and other producers to fill the gap.

“The U.S. government’s tough stance raised the stakes for a more significant Iran export loss than previously foreseen,” said Norbert Ruecker, head of macro and commodity research at Swiss bank Julius Baer.

Oil prices have extended a rally on expectations the sanctions will test the Organization of the Petroleum Exporting Countries and other producers. Brent crude LCOc1 on Wednesday last week reached $86.74 a barrel, the highest since 2014.

None of the Iranian crude exported in the first week of October is heading for Europe, according to the Refinitiv data. The tankers are sailing to India, China and the Middle East.

While Washington has said it wants to cut Iran’s oil exports to zero, Iran and Saudi Arabia say that is unlikely. The Trump administration is considering waivers on sanctions for countries that are reducing their imports.

India, a major buyer, has ordered Iranian oil for November, although New Delhi does not yet know whether it will receive such a waiver.

Iran has questioned whether the market needs more oil and says its output is holding steady at about 3.8 million bpd. Iran has pledged to block any OPEC supply increase that the country deems to be against its interest.

“The market does not want a single barrel,” Iran’s representative on OPEC’s board of governors, Hossein Kazempour Ardebili, told Reuters in late September.

But figures OPEC compiles from secondary sources that include oil-industry media and government agencies put output in August at 3.58 million bpd, down 150,000 bpd from July. Some of these sources say output fell further in September.

Iran may indeed have not cut production yet to match the rate of decline in its exports, as the country appears to be storing more oil on ships as it did during sanctions that applied until the 2015 nuclear deal.