Energy Prospectus

I will be going over the details of Raymond James new Oil Price Forecast at our Hess Club luncheon on Tuesday, October 22. Seating is limited to 60, so PLEASE register ASAP if you plan to attend. - Dan

Raymond James Energy Stat October 22, 2018: Oil Prices Must Rise Enough to Start Erasing Demand – And That Means $100 Brent in 2020

"For the past two years, we have consistently maintained one of the most bullish oil price outlooks on the street. Despite recent bearish U.S. oil inventory builds, our already bullish 2019/2020 global oil supply/demand model has recently become even more bullish due largely to deteriorating supply outlooks for both Iranian and Venezuelan exports as well as further clarity on IMO 2020. After raising our oil price forecast in April and again in July, we are now raising our oil price forecast again - maybe the third time will be the charm! The bottom line is get ready for triple digit oil prices in the next few years."

"It is important to note that this is not just a near-term issue for the next year or two: the picture beyond 2020 continues to suggest higher long-term oil prices after we refine our assumptions for global oil demand growth, U.S. base decline rates, OPEC production capacity, and non-U.S. supply. Bottom line: We now believe that oil prices over the next two years must increase to levels that are high enough to materially slow down global demand growth. Accordingly, we are raising our 2019 oil forecast by $10/Bbl (or about 15%), to $77.50/Bbl WTI and $90/Bbl Brent. We now think 2020 will be a cyclical peak year due to IMO 2020, so our forecast rises even more sharply, to $92.50 WTI and $100 Brent. Not only is our new price deck at the high end of consensus, it is even more strikingly bullish when compared to the sharply backwardated futures curve. Specifically, our 2020 oil price estimates are now about 40% ABOVE the current futures strip. Beyond 2020, we are also raising our long-term oil price deck by $5, to $75 WTI and $80 Brent (which is about 30% above strip pricing). While our main focus will be on oil today, we will also preview our updated natural gas price forecast, which we will follow up with a more detailed report in the coming weeks."
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I will continue to assume $65/Bbl WTI in all of my forecast/valuation models until WTI moves firmly over $75/Bbl. I do agree with RJ's conclusion that the global oil market is going to get VERY TIGHT in the next few months and oil price must and will move higher to bring down demand. - Dan

On October 19 Reuters reported OPEC is struggling to add barrels to the market after agreeing in June to increase output, an internal document seen by Reuters showed, as an increase in Saudi Arabia was offset by declines in Iran, Venezuela and Angola.

Saudi Energy Minister Khalid al-Falih said OPEC and non-OPEC would pump roughly an extra 1 million b/d following the June agreement. The OPEC document seen by Reuters adds to signs they have yet to deliver the full amount. OPEC says it is on course to do so, although it hasn't given a timeframe. "It is a work in progress," OPEC Secretary General Mohammad Barkindo said earlier this week. The internal document prepared by OPEC's Vienna headquarters for a technical panel meeting on Friday showed that OPEC members, excluding Nigeria, Libya and Congo pumped an extra 428,000 bpd in September compared to May. Top exporter Saudi Arabia pumped most of the extra oil, raising output by 524,000 b/d in September compared to May, the document showed. Other increases came from Iraq, Kuwait and the United Arab Emirates.

Iran, facing U.S. sanctions on its oil exports from November 4, cut production by 376,000 b/d in September versus May, and has said OPEC and Saudi Arabia are not able to make up for a total loss of its exports. "There is no spare capacity," Iran's OPEC governor, Hossein Kazempour Ardebili, said last month. Among other OPEC members, production fell by 189,000 b/d in Venezuela and by 17,000 b/d in Angola. The non-OPEC nations cooperating with OPEC pumped an extra 296,000 b/d since May, the OPEC document showed. Russia increased output by 389,000 b/d, although Kazakhstan, Mexico and Malaysia posted declines.

On October 15 Reuters reported Turkey and Italy are the last buyers of Iranian crude outside China, India and the Middle East, according to tanker data and an industry source, the latest sign that shipments are taking a major hit from looming U.S. sanctions. The Islamic Republic has exported 1.33 million b/d so far in October to India, China, Turkey and the Middle East, according to Refinitiv Eikon data. No vessels are shown heading to Europe with Iranian crude. However, an industry source who also tracks the exports estimated shipments at 1.5 million b/d, including vessels which are not showing on AIS satellite tracking. That's down from at least 2.5 million b/d in April, before President Donald Trump in May withdrew the United States from a 2015 nuclear deal with Iran and reimposed sanctions. The figures also mark a further fall from 1.6 million b/d in September. In the first week of October, Iran's crude exports averaged 1.1 million b/d according to Refinitiv and less than 1 million b/d according to another industry source.

IMO 2020 Update:

Benny Wong – Energy Sector Analyst at Morgan Stanley
October 22, 2018 4:27 AM GMT

We believe the reaction by refining stocks on the fear of an IMO 2020 delay is overdone. We are skeptical on how much of an impact White House involvement this late in the game will have.

Refining stocks sharply fell 5% (7% in the US and 3% in Asia) on headlines the White House is seeking to slow IMO 2020. On Thursday (Oct. 18), the Wall Street Journal reported that the US administration is concerned the approaching marine fuel regulation change will have a damaging effect on the economy with rising fuel costs (see here). White House representatives have stated there is no intent to withdraw or delay the implementation of IMO 2020. However the US is backing a proposal that calls for enforcement measures to be pragmatic, particularly until there is clarity around compliant fuel availability (see below). We are skeptical of how significant an impact the US can have this late in the game given: 1) the International Maritime Organization (IMO) has publicly rejected any calls to water down the fuel cap, 2) the fuel change already has wide support from many countries including the EU and China, 3) a coalition of at least ⅓ IMO members would be needed to advance amendments, and 4) the organization's rulemaking process can take up to ~22 months. Nonetheless we recognize there will likely be continued uncertainty until the rules, particularly around enforcement, are fully finalized and clear, but believe the recent negative reaction of refining stocks was overdone. We remain bullish and believe IMO 2020 is still an incremental tailwind to global and complex refiners who are already attractively set up with a constructive S/D picture. Focus increases on the IMO meetings this week.