Energy Prospectus

Energy Stat: Oil Update — Raising Price Deck Again as Inventories/OPEC+ Spare Capacity Shrink

Send me an email if you'd like to see the full report: dmsteffens@comcast.net

From JOHN FREEMAN, CFA and JUSTIN JENKINS at Raymond James

While Russia/Ukraine headlines dominate the global backdrop, one thing has become increasingly clear: The oil market is extremely tight, with few protective buffers. Our bullish oil view over the next few years not only remains firm, but we’re again increasing our long-term price forecast. Our updated price deck envisions WTI averaging ~$100 for 2022, “dipping down” to a ~$90 average for 2023, before reaching our new “long-term” forecast of $80/Bbl.

As we’ll outline in today’s Stat, there are several reasons for remaining bullish even after a very strong run in the commodity: 1) extremely low global inventories,
2) visible recovery in demand (plus IEA revisions!!),
3) the coming collapse in OPEC+ spare capacity, and
4) the need for a higher structural price to further incentivize U.S. supply (and, just as importantly, keep a lid on demand growth).

The summary version: Global inventories are way too tight, with more draws coming in 2022… all while OPEC+ spare capacity shrinks. < You heard it here on EPG!

Near-term supply-side items to watch: Russia unknowns, potential for a deal with Iran, OPEC+ ability to hit targets.

Oil demand recovery continues, even with higher prices — What does a demand recovery look like into 2023?

OPEC+ discipline has cleaned up the inventory overhang (and then some). Long-term we need to pull every "lever" to improve dangerously low inventory levels.

U.S. E&P Capital Discipline Remains the Most Bullish Long-Term Development.

Tight inventory outlook, limited global buffer supports a bullish price outlook: Raising price forecast for all periods.

February 22, 2022
Raymond James Equity Research
880 Carillon Parkway | St. Petersburg, FL 33716 | 800.237.5643

Not today though. I guess Putin didn't kill enough people today. S&P recovered somewhat, and oil barely moved after the early jump retreated. I wonder how many Ukranians have to die before we really come down on Russia.

It really doesn't matter what Russia does in Ukraine. I hope Putin moves slowly and allows the people who want to leave Ukraine to get out. Plus, it is what the U.S. and NATO does in response to what Putin does. If they do anything that takes Russian oil off the market, we will see a big spike in the oil price. Commodity price spikes in response to geopolitical "noise" don't last long.

As I have been stressing in my weekly podcasts for almost a year, it is the unacceptable level of OECD petroleum inventories that will push oil prices higher.

From the Raymond James report:
"Since peaking in 2Q20, global inventories have been drawing at an astonishing pace. Newly-revised (finally!) IEA data shows an average draw of
nearly 2 million bpd from the end of 2Q20 to YE21, resulting in more than 1 billion barrels of inventory draws in six quarters. This has fully erased
the 2019 and 1H20 build, pushing OECD inventories well below normal levels. Our updated model shows continued draws in 2022 before flipping
to a very modest inventory build in 2023. The question from our last update of “how are you bullish with builds?” arises again, in a more bullish
way — and the answer: We need to rebuild oil inventories, and we’re not. Nearly all global inventory indicators are well below the bottom end
of 5-year ranges, and that’s before demand heads back to above pre-COVID levels, all while OPEC+ spare capacity is set to decline rapidly. Some
key assumptions, detailed later, include 1) global demand averages above 101 million bpd for 2022, reaching 104 million bpd for 2023; 2) OPEC
+ production curtailments are unwound by the end of 2022, as per the group's recent agreement, but spare capacity is exceedingly tight in 2023;
and 3) U.S. production growth in 2022 and 2023 remains subdued relative to prior bullish cycles given producer discipline (private E&Ps should
be thanking their public counterparts)."