Oil Price Forecast - Oct 19

[dan_s]

Martijn Rats, CFA – Morgan Stanley
October 19, 2018 6:35 PM GMT

WTI closed at $69.45/bbl on Friday, October 19

Recent trends in refining margins, time spreads and inventories suggest a spell of weakness in oil markets. This will likely weigh on prices near term but we expect this to be temporary. The medium-term outlook remains constructive and we still see Brent reaching $85/bbl by year-end.

Despite flat price strength in recent weeks, incoming data points have been
mixed at best: After reaching $85/bbl, Brent prices have sold off recently in
lockstep with other risk assets. Yet, there is more to it than wider macro
concerns. Oil demand growth has been lackluster in several countries recently,
e.g. India, South Korea. Inventory data has come in weaker-than-expected.
Refining margins have come under pressure, reaching levels in Europe where
runs cuts typically take place. Time spreads have struggled to perform, reflecting
less market tightness, and take-away capacity available in the Permian by late
2019 has increased following several operator announcements.

Yet, some of these are likely transitory and the medium-term outlook remains
constructive: These factors put a cap on oil prices in the next few months. Yet,
the pillars of oil market strength over the last few months are still there:
inventories and spare capacity are both low by historical standards, leaving little
buffer in the oil market. Iran's exports will likely continue to fall as US sanctions
kick-in. Pipeline capacity in the Permian will still be a bottleneck during much of
2019. Production declines in Venezuela continue and Angola's supply looks to
roll over into year-end again. Finally, the implementation of IMO 2020 will
accelerate refinery crude runs from mid-2019 onwards.

Our updated balances continue to point towards draws in coming quarters: We
have lowered our oil demand growth for 2019 from +1.6 to +1.5 mb/d to take into
account some risk of demand erosion. Also, we have added ~0.3 mb/d to our
2019 Permian forecast. At the same time, we have revised our Iranian production
forecast lower by ~0.2 mb/d for next year, and have reduced our Canadian
production forecast after the recent decline in WCS prices. Saudi Arabia, Kuwait,
the UAE, Iraq and Russia continue to produce at all-time high levels in our
balances, further eating into spare capacity. Yet, we continue to see a deficit
during the remainder of 2018 and 2019.

On that basis, we stick to our call for Brent to reach $85/bbl by year-end: Our
forecast for OECD inventory draws would historically be consistent with a
widening of the 1-12 month Brent time spread from $2.7/bbl at the moment to
$6/bbl by early next year. That time spread typically supports Brent at $85/bbl.
Rallying beyond that may be hard in the short term, but this outcome remains
likely by year-end.

[dan_s]

Goldman: $100 oil not likely. Jeff Currie, head of commodities research at Goldman Sachs, said that $100 oil is not “very likely.” “We're not saying $100 oil cannot happen. It's not our base case nor do we think it's very likely,” Currie told S&P Global Platts in an interview. Reaching $100 would require a “sustainable loss in all of Iran's oil exports for an extendable period of time.”

MY TAKE: It is a common belief that upstream companies cannot make money at $65-$70 oil price. Not only will they make money, the profits are as good or better at today's oil prices than they were back in 2013-2014 when oil was $100/bbl. NONE of the Sweet 16 had average "realized oil prices" over $50/bbl during the first half of 2018 and they were all profitable.

Perceptions to matter, until they don't. Paradigm Shifts can happen suddenly.

[dan_s]

The oil market is suddenly rather sanguine about a supply shortage in the short run. “The concerns about a tightening of supply, which dominated markets until two weeks ago, have abated despite the fact that the reasons for them (falling Iranian oil exports, declining oil production in Venezuela, reduced spare capacities) still apply,” Commerzbank said in a note. The bank said that the recent uptick in inventories provides some cover, and traders are no longer on edge about shortages. “Nonetheless, we believe it is still too early to sound the all-clear for the oil market.”