Energy Prospectus

RJ's Energy Sector Team has raised their WTI oil price forecast. If you'd like to read the full report send me an email dmsteffens@comcast.net

Energy Stat: Oil Update — Raising Price Deck Again as Inventories/OPEC+ Spare Capacity Shrink
May 2, 2022

Summary:
While Russia/Ukraine headlines still dominate the global backdrop, one thing remains very clear: the oil market is extremely tight, with few protective buffers. Our bullish oil view over the next few years remains firm, and we’re again increasing our price forecast. Our updated price deck envisions WTI averaging ~$105 for 2022 ($100 previously), peaking in 3Q22 (average $115 during the quarter, but reaching much higher levels at the peak), before drifting toward ~$100 average in 2023 ($90 previously). Our “long-term” forecast of $80/Bbl remains unchanged.
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) supply losses that offset demand destruction fears, 3) the coming collapse in OPEC+ spare capacity, especially in Russia, and 4) the need for a higher structural price to further incentivize U.S. supply (which remains muted relative to commodity price environment).

The summary version:

> Global inventories are way too tight, with more draws coming in 2022… all while OPEC+ spare capacity shrinks.

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

> Oil demand recovery continues, but at slower rate than assumed previously due to China lockdowns and impact from cost inflation.

> OPEC+ excess capacity drops to frighteningly low levels by 2023.

> Amidst Surging Commodity Prices, U.S. E&P Capital Discipline Remains the Most Bullish Long-Term Development.

> Tight inventory outlook, limited global buffer supports a bullish price outlook.
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MY TAKE:
> Supply Chain issues + lack of quality people, equipment and infrastructure will delay an oil supply increase in the U.S. no matter how high oil prices go.
> High gasoline prices are not going to keep Americans from travelling this year. Family vacations are way overdue.
> Diesel shortages could become a BIG PROBLEM.

Read this carefully.

"Since peaking in 2Q20, global petroleum inventories have been drawing at an astonishing pace.
IEA data shows an average draw of more than 2 million bpd from the end of 2Q20 to YE21, though inexplicably still shows a slight build in 1Q22 (which we expect to be revised to a draw). 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 balanced market in 2023. A different question from our last update of “how are you bullish with a balanced market in 2023?” 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 less than 100 million bpd for 2022 (impacted by China lockdowns), reaching only 101 million bpd for 2023; 2) severe Russian production losses by 3Q22, 3) 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 4) 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)."

MY TAKE: Unless the sanctions are lifted against Russia, there is no way the global oil market will balance in 2023.

This is why oil prices MUST GO HIGHER to balance supply/demand.

"Global OECD inventories are already way below (~450 MMbbls) pre-pandemic levels and U.S. crude inventory is ~335 MMbbls below 2019 levels. We model
accelerating draws in 2H22 driven namely by Russia supply impact and recovering demand (albeit we are now modeling slower demand growth than previous given China lockdowns and cost inflation pressure). In 2023, we are modeling a balanced market, but the reality is that we need inventory builds, and they aren’t happening. Global inventories are running with a smaller buffer than historical levels, while at the same time there will be ever-dwindling OPEC+ spare capacity and a much-lower structural growth rate from U.S. producers."

I was scratching my head today when I saw oil down $ 3 bucks. Say what the heck is going on.
Only short term thing I could come up with is slowing China growth .

The longer term fundamentals are clearly bullish

I found Dan's comments in this week webinar very interesting as we may have a perfect storm in NG due to supply/demand issues perhaps a 10 handle this summer. I'm going to watch the weekly numbers like a hawk.

Crude back to 105 at noon