Energy & Power - Stifel’s Crude But Refined Thoughts by Derrick Whitfield
Bracketing last week's selloff and highlighting stock opportunities - While our macro view
remains unchanged, we are assessing oil market implications from tariffs after last
week's crude sell-off. The IMF estimates tariffs could decrease China's real GDP by
1.0% by 2020. Assuming decreased 2019/2020 real global GDP growth of 0.3%/0.6%,
we expect 2019/2020 global crude demand growth to decline 0.3/0.8 mmbopd. We
believe two responses are possible: i) extending OPEC+ cuts (buy oversold beta for
quick recovery) or ii) reducing U.S. Onshore activity (buy oversold quality for 2H19
recovery). At $59.00/bbl, the commodity price risk-reward is relatively balanced as
$65.00/bbl is the likely outcome of extending OPEC+ cuts and $50.00/bbl is the
breakpoint for U.S. Onshore activity. However, the stock risk-reward is favorable as
the sector is pricing a scenario more bearish than strip. We favor INSW, OAS, PAA,
PUMP, RRC, and SM for a quick recovery and BHGE, CXO, EQT, EURN, NBL, and
WMB for a 2H19 recovery.
Oil Market Outlook by Stifel - May 28
Oil Market Outlook by Stifel - May 28
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Market Outlook by Stifel - May 28
From Marshall Atkins at Raymond James
Over the past several weeks oil prices have pulled back ~10% largely on concerns over rising U.S. crude inventories. U.S. crude inventories have shown significant builds – with total crude stocks (including SPR) up ~23 million barrels since early April. Despite the recent negative U.S. oil inventory data, we remain very bullish on crude prices this summer and for the next couple of years. We see U.S. oil inventory concerns as way overblown since they can be explained by higher net imports due to a shift in the Brent to U.S. Gulf Coast (MEH) oil price spreads. Further complicating the issue has been understated U.S. net imports – which, as we explain in today’s note, are being understated in the weekly data and showing up in the (increasing important) 'unaccounted for oil' balance used by the EIA.
Overall, in today’s Stat of the Week, we will detail why we think U.S. oil inventory concerns are way overblown and we will: 1) recap the relationship between Houston Ship Channel (MEH) to Brent oil price spreads and their impact on U.S. net crude imports, 2) look at the EIA’s balancing mechanism to detail why we think imports are being understated, 3) highlight where we think imports trend from here (and what that means for U.S. crude inventories), and 4) update our still bullish view of the global supply demand balance for recent changes. All in, while we think the recent U.S. oil inventory data has been negative, we believe market concerns are overblown since we think U.S. oil inventories are poised to fall sharply over the next few months, driving U.S. oil inventories lower and oil prices higher.
Send me an email if you'd like to read the full report from Raymond James (dmsteffens@comcast.net)
Over the past several weeks oil prices have pulled back ~10% largely on concerns over rising U.S. crude inventories. U.S. crude inventories have shown significant builds – with total crude stocks (including SPR) up ~23 million barrels since early April. Despite the recent negative U.S. oil inventory data, we remain very bullish on crude prices this summer and for the next couple of years. We see U.S. oil inventory concerns as way overblown since they can be explained by higher net imports due to a shift in the Brent to U.S. Gulf Coast (MEH) oil price spreads. Further complicating the issue has been understated U.S. net imports – which, as we explain in today’s note, are being understated in the weekly data and showing up in the (increasing important) 'unaccounted for oil' balance used by the EIA.
Overall, in today’s Stat of the Week, we will detail why we think U.S. oil inventory concerns are way overblown and we will: 1) recap the relationship between Houston Ship Channel (MEH) to Brent oil price spreads and their impact on U.S. net crude imports, 2) look at the EIA’s balancing mechanism to detail why we think imports are being understated, 3) highlight where we think imports trend from here (and what that means for U.S. crude inventories), and 4) update our still bullish view of the global supply demand balance for recent changes. All in, while we think the recent U.S. oil inventory data has been negative, we believe market concerns are overblown since we think U.S. oil inventories are poised to fall sharply over the next few months, driving U.S. oil inventories lower and oil prices higher.
Send me an email if you'd like to read the full report from Raymond James (dmsteffens@comcast.net)
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Market Outlook by Stifel - May 28
From John White at Roth Capital
Changes to Relative Value Tables:
We have made the following changes to our relative value tables: 1) we have deleted HK (HK-Buy) as the outsized recent stock price performance distorts our graphics and the depressed valuation also distorts our analysis, 2) we have added Magnolia Oil & Gas (MGY-NC) to our Large Cap Oil Weighted peer group and to our Eagle Ford Shale peer group, 3) due to declining stock prices we have moved Chaparral Energy, Inc. (CHAP-Buy) and Ring Energy (REI-Buy) from our Mid-Cap-Oil Weighted peer group to our Small Cap Oil weighted peer group, 4) Penn Virginia (PVAC-NC) is also added to the Small Cap Oil weighted peer group and the Eagle Ford Shale group, 5) SilverBow Resources (SBOW-NC) is added to our Small and Mid-Cap Natural Gas Weighted peer group and to the Eagle Ford Shale peer group, and 6) in recognition of the investor clamor for more equity returns, we have added the estimated 2019 dividend yield for each stock.
We note Evolution Petroleum (EPM-Buy) has the highest dividend yield of any of the stocks shown, at a generous 6.3%. EPM’s dividend yield is 3.2x the 2.0% yield of DIA (DIA-NC), the Dow Jones Industrial Average ETF and is 3.5x the 1.8% yield of SPY (SPY-NC), the S&P 500 ETF.
Changes to Relative Value Tables:
We have made the following changes to our relative value tables: 1) we have deleted HK (HK-Buy) as the outsized recent stock price performance distorts our graphics and the depressed valuation also distorts our analysis, 2) we have added Magnolia Oil & Gas (MGY-NC) to our Large Cap Oil Weighted peer group and to our Eagle Ford Shale peer group, 3) due to declining stock prices we have moved Chaparral Energy, Inc. (CHAP-Buy) and Ring Energy (REI-Buy) from our Mid-Cap-Oil Weighted peer group to our Small Cap Oil weighted peer group, 4) Penn Virginia (PVAC-NC) is also added to the Small Cap Oil weighted peer group and the Eagle Ford Shale group, 5) SilverBow Resources (SBOW-NC) is added to our Small and Mid-Cap Natural Gas Weighted peer group and to the Eagle Ford Shale peer group, and 6) in recognition of the investor clamor for more equity returns, we have added the estimated 2019 dividend yield for each stock.
We note Evolution Petroleum (EPM-Buy) has the highest dividend yield of any of the stocks shown, at a generous 6.3%. EPM’s dividend yield is 3.2x the 2.0% yield of DIA (DIA-NC), the Dow Jones Industrial Average ETF and is 3.5x the 1.8% yield of SPY (SPY-NC), the S&P 500 ETF.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Market Outlook by Stifel - May 28
Cut from the Raymond James report:
There have been some concerning data points, but overall we still hold our bullish view.
Globally, clearly with China-U.S. trade war fears there has been an uptick in concerns around global oil demand. However, we think these fears are
mostly overblown - as demand is not a measured data point, and thus, much of these fears have been conjecture at this point. More importantly,
we have seen numerous supply interruptions emerge over the past two months, which "Trump" emerging concerns over demand. Specifically,
the bullish supply factors pointing to a tighter market than we thought previously:
● Issues with the Druzhba pipeline between Russia and Europe persist. Recall the pipeline – which has a capacity more than a million bpd
- was halted in April after high levels of organic chlorides were discovered in the crude flowing through it. Initially, the operator Transneft
promised that operations would resume within days, but a month later flows through the pipeline remain little more than a trickle. Some
estimates indicate that as much as 40 million barrels of crude may be contaminated, meaning it could take months and hundreds of millions
of dollars in clean up costs before operations can be fully restored. In the meantime, a tenth of Russian production remains stranded in the
country, and we would not be surprised to see output being reduced as excess storage capacity runs out.
● Venezuelan production continues to decline faster than we had expected. We currently model production averaging 1.05 MMbpd this
quarter - 200,000 bpd more than the country actually produced in April. It is clear that the situation has only worsened in the past few weeks,
with some media reports indicating that production in the Orinoco belt has fallen to less than 200,000 bpd – down more than half from April
levels. With it becoming increasingly difficult for the country to import the diluents needed to make its heavy crude usable, there is little hope
for a reversal of the trend anytime in the near future.
● U.S. sanctions on Iran’s oil industry have been significantly more effective than expected. After the Trump administration refused to
renew waivers for importers of Iranian crude last month, purchases have declined significantly. It is believed the country will export less than
500,000 bpd this month, down from nearly 2 million bpd before the sanctions were announced. Even Turkey and China, which had promised to
defy Washington, have had to reduce purchases. Reports indicate that Turkey has not purchased any crude since the waivers were rescinded,
and both Sinopec and CNPC - China's top state-owned refiners - have skipped bookings for cargoes loading in May.
● Despite market expectations, Saudi Arabia has not increased production to offset the decline in Iranian exports. According to the State
Department, the administration consulted with Saudi Arabia before announcing the end of waivers for Iranian oil importers. It has widely been
believed that it received some assurances that Saudi Arabia would increase oil supply if the waivers were fully removed. Despite this, Saudi
production has not increased to offset the decline in Iranian exports. While Saudi production has begun to creep up – it will likely average around
10 million bpd in May, up 200,000 bpd from April – most of this incremental production is going towards meeting higher summer domestic
electricity demand rather than being exported to offset Iranian declines.
Conclusion: Bullish global oil fundamentals obscured by temporary surge in U.S. crude imports and U.S. inventories.
As we detail in today’s report, we think the primary factor driving the recent crude inventory builds has been a narrower Brent-Houston (MEH) oil
price spread that has driven increases in U.S. net crude imports over the past 6 weeks. More importantly, since this oil price spread has reversed
over the past 3 weeks we would expect net U.S. imports and thus U.S. oil inventories to fall over the next month. Put simply, we think lower net
imports in the coming weeks and months should drive substantial U.S. inventory draws (particularly as we progress towards summer driving
season), thus providing more support for higher oil prices through the summer. While the market is becoming increasingly concerned about oil
demand, we think there have been much more bullish developments on the supply side that suggest global oil supply and demand balance
is meaningfully tighter than the market currently understands. As the transitory impacts dissipate and as U.S. inventories improve, the market
should gain more clarity and drive oil prices significantly higher.
There have been some concerning data points, but overall we still hold our bullish view.
Globally, clearly with China-U.S. trade war fears there has been an uptick in concerns around global oil demand. However, we think these fears are
mostly overblown - as demand is not a measured data point, and thus, much of these fears have been conjecture at this point. More importantly,
we have seen numerous supply interruptions emerge over the past two months, which "Trump" emerging concerns over demand. Specifically,
the bullish supply factors pointing to a tighter market than we thought previously:
● Issues with the Druzhba pipeline between Russia and Europe persist. Recall the pipeline – which has a capacity more than a million bpd
- was halted in April after high levels of organic chlorides were discovered in the crude flowing through it. Initially, the operator Transneft
promised that operations would resume within days, but a month later flows through the pipeline remain little more than a trickle. Some
estimates indicate that as much as 40 million barrels of crude may be contaminated, meaning it could take months and hundreds of millions
of dollars in clean up costs before operations can be fully restored. In the meantime, a tenth of Russian production remains stranded in the
country, and we would not be surprised to see output being reduced as excess storage capacity runs out.
● Venezuelan production continues to decline faster than we had expected. We currently model production averaging 1.05 MMbpd this
quarter - 200,000 bpd more than the country actually produced in April. It is clear that the situation has only worsened in the past few weeks,
with some media reports indicating that production in the Orinoco belt has fallen to less than 200,000 bpd – down more than half from April
levels. With it becoming increasingly difficult for the country to import the diluents needed to make its heavy crude usable, there is little hope
for a reversal of the trend anytime in the near future.
● U.S. sanctions on Iran’s oil industry have been significantly more effective than expected. After the Trump administration refused to
renew waivers for importers of Iranian crude last month, purchases have declined significantly. It is believed the country will export less than
500,000 bpd this month, down from nearly 2 million bpd before the sanctions were announced. Even Turkey and China, which had promised to
defy Washington, have had to reduce purchases. Reports indicate that Turkey has not purchased any crude since the waivers were rescinded,
and both Sinopec and CNPC - China's top state-owned refiners - have skipped bookings for cargoes loading in May.
● Despite market expectations, Saudi Arabia has not increased production to offset the decline in Iranian exports. According to the State
Department, the administration consulted with Saudi Arabia before announcing the end of waivers for Iranian oil importers. It has widely been
believed that it received some assurances that Saudi Arabia would increase oil supply if the waivers were fully removed. Despite this, Saudi
production has not increased to offset the decline in Iranian exports. While Saudi production has begun to creep up – it will likely average around
10 million bpd in May, up 200,000 bpd from April – most of this incremental production is going towards meeting higher summer domestic
electricity demand rather than being exported to offset Iranian declines.
Conclusion: Bullish global oil fundamentals obscured by temporary surge in U.S. crude imports and U.S. inventories.
As we detail in today’s report, we think the primary factor driving the recent crude inventory builds has been a narrower Brent-Houston (MEH) oil
price spread that has driven increases in U.S. net crude imports over the past 6 weeks. More importantly, since this oil price spread has reversed
over the past 3 weeks we would expect net U.S. imports and thus U.S. oil inventories to fall over the next month. Put simply, we think lower net
imports in the coming weeks and months should drive substantial U.S. inventory draws (particularly as we progress towards summer driving
season), thus providing more support for higher oil prices through the summer. While the market is becoming increasingly concerned about oil
demand, we think there have been much more bullish developments on the supply side that suggest global oil supply and demand balance
is meaningfully tighter than the market currently understands. As the transitory impacts dissipate and as U.S. inventories improve, the market
should gain more clarity and drive oil prices significantly higher.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group