Energy Prospectus

OIL JUMPS

Rising tensions in the Middle East, which have supported oil prices, ratcheted up another notch on the weekend as U.S. President Donald Trump issued new threats, tweeting that a conflict with Iran would be the “official end” of that country.

But it was comments from Saudi Arabia’s energy minister that had the most immediate effect on crude prices on Monday.

Saudi Energy Minister Khalid al-Falih said that there was consensus among the members of the Organization of the Petroleum Exporting Countries to maintain production cuts to “gently” reduce inventories.

Both U.S. crude and Brent crude jumped more than 1.4% following the minister’s comments, with West Texas Intermediate fetching $63.66 a barrel and Brent crude at $73.27 per barrel.

https://www.reuters.com/article/us-glob ... SQ02O?il=0

All of this market manipulation/foreign production disruptions have not helped the price of energy stocks. It makes me wonder what the prices would look like if the market ever approaches "normalcy.'" Frankly, at this moment it looks like an investment in energy may be a big mistake.

Martijn Rats, CFA – Morgan Stanley
May 20, 2019 6:23 AM GMT

The JMMC meeting on Sunday ended without a formal recommendation but laid the ground works for an extension of the current OPEC quota into 2H when OPEC meets again on 25/26 June. This would be a relatively constructive outcome. On our numbers, there is room to add oil supplies in the second half, with 3Q looking especially tight. Still, OPEC is faced with a number of large uncertainties, so far pointing in opposite directions: demand has been coming in relatively weak recently but there is also further downside risk to supply in a number of critical countries. With the sell-off of late last year still fresh in their minds, OPEC is progressing cautiously. Crucially, Khalid al-Falih, the Saudi oil minister, emphasised the need to continue to draw global inventories down further and added that at least Saudi Arabia's production would not meaningfully increase in May as well as June.

If inventories decline over the summer months - and without extra supplies from core OPEC countries, we expect they will - the forward curve should remain in steep backwardation, which supports spot prices. Our call remains for Brent to trade into the $75-80/bbl range in 2H19. < This would push WTI up to $70/bbl; that is right in the middle of my estimated "Right Price" for oil.