Why should oil prices move even higher?
Posted: Mon Jun 20, 2022 11:53 am
On this Friday's live webinar I will be joined by Michael Churchill, an EPG member and a very sharp economist that helps me understand the macro economy. Below is a note that I sent him this morning. You must register to attend the live webinar on Friday, June 24.
-----------------------------------
The Raymond James energy sector team believes that OECD commercial petroleum inventories above ground (measured on "Days of Consumption") is the key driver of oil prices. See the chart on the bottom of page one of RJ's May 2, 2022 Industry Brief attached. < Send me an email if you'd like to read this RJ report and I will send it to you. My direct email is dmsteffens@comcast.net
Here is the logic for Goldman Sach and JPMorgan forecasts of oil going to $140/bbl in the next few months:
> When OECD petroleum inventories are falling, like they have been since peaking in mid-2020 (thanks to demand destruction caused by the pandemic), oil prices go up. OECD petroleum inventories are the best picture of where supply & demand for oil-based products stand each quarter.
> This oil price cycle bottomed in Q2 2020 because supply exceeded demand by a wide margin and OECD petroleum inventories rose quickly; so fast that upstream companies were forced to shut-in wells. NYMEX WTI futures briefly went negative and in the physical market WTI dipped to $12, but quickly returned to ~$40 by the end of Q2 2020.
> Upstream oil companies slashed their drilling programs in early 2020 and demand for oil-based products began to rise again in Q3 2020.
> OECD inventories returned to normal (~30 Days of Consumption) in Q2 2021 and WTI averaged ~$75/bbl in 2H 2021.
> Except for brief pullbacks due to the FEAR of new Covid variants, the price of oil (the blue line on the chart on page 1 of the RJ report) has been going up.
> IMO the Covid 19 Pandemic ended in Q1 2022 (people finally quit listening to Dr. Fauci's BS) and demand for oil-based products rose quickly in "Post-Pandemic World".
> Oil demand returned quickly to pre-pandemic levels, but oil supply has lagged.
> KEY STAT: OECD Petroleum Inventories are now at 25 Days of Consumption. They have NEVER been that low.
> See chart attached: Based on the historical relationship between OECD Petroleum Inventories measured on Days of Consumption, the "Right Price" for WTI is now $110/bbl; which is where we are today.
> Adding much higher geopolitical risk and the fact that OPEC is now out of spare capacity (the primary reason WTI spiked to $147 in early 2008), the "Right Price" for WTI is probably now in the $130 to $140 range.
> Keep in mind that the U.S. and other OECD countries are draining their Strategic Petroleum Reserves, which eventually must be refilled. < This should keep WTI over $100/bbl until SPR's are refilled, which may take years.
MY TAKE: If OECD inventories keep falling, oil prices must go up to lower demand. Why? because this world's economy cannot function with refined product inventories much lower. U.S. diesel inventories are 23% below normal and this country runs on diesel. If a Gulf of Mexico hurricane knocks out some refining capacity, we are screwed!
-----------------------------------
The Raymond James energy sector team believes that OECD commercial petroleum inventories above ground (measured on "Days of Consumption") is the key driver of oil prices. See the chart on the bottom of page one of RJ's May 2, 2022 Industry Brief attached. < Send me an email if you'd like to read this RJ report and I will send it to you. My direct email is dmsteffens@comcast.net
Here is the logic for Goldman Sach and JPMorgan forecasts of oil going to $140/bbl in the next few months:
> When OECD petroleum inventories are falling, like they have been since peaking in mid-2020 (thanks to demand destruction caused by the pandemic), oil prices go up. OECD petroleum inventories are the best picture of where supply & demand for oil-based products stand each quarter.
> This oil price cycle bottomed in Q2 2020 because supply exceeded demand by a wide margin and OECD petroleum inventories rose quickly; so fast that upstream companies were forced to shut-in wells. NYMEX WTI futures briefly went negative and in the physical market WTI dipped to $12, but quickly returned to ~$40 by the end of Q2 2020.
> Upstream oil companies slashed their drilling programs in early 2020 and demand for oil-based products began to rise again in Q3 2020.
> OECD inventories returned to normal (~30 Days of Consumption) in Q2 2021 and WTI averaged ~$75/bbl in 2H 2021.
> Except for brief pullbacks due to the FEAR of new Covid variants, the price of oil (the blue line on the chart on page 1 of the RJ report) has been going up.
> IMO the Covid 19 Pandemic ended in Q1 2022 (people finally quit listening to Dr. Fauci's BS) and demand for oil-based products rose quickly in "Post-Pandemic World".
> Oil demand returned quickly to pre-pandemic levels, but oil supply has lagged.
> KEY STAT: OECD Petroleum Inventories are now at 25 Days of Consumption. They have NEVER been that low.
> See chart attached: Based on the historical relationship between OECD Petroleum Inventories measured on Days of Consumption, the "Right Price" for WTI is now $110/bbl; which is where we are today.
> Adding much higher geopolitical risk and the fact that OPEC is now out of spare capacity (the primary reason WTI spiked to $147 in early 2008), the "Right Price" for WTI is probably now in the $130 to $140 range.
> Keep in mind that the U.S. and other OECD countries are draining their Strategic Petroleum Reserves, which eventually must be refilled. < This should keep WTI over $100/bbl until SPR's are refilled, which may take years.
MY TAKE: If OECD inventories keep falling, oil prices must go up to lower demand. Why? because this world's economy cannot function with refined product inventories much lower. U.S. diesel inventories are 23% below normal and this country runs on diesel. If a Gulf of Mexico hurricane knocks out some refining capacity, we are screwed!