Energy Prospectus

FLASH REPORT from the Raymond James Energy Sector Team received this morning. Send me an email if you'd like to read the full report. Send to dmsteffens@comcast.net
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In the 12+ months since the start of the Russia-Ukraine war, the oil market has seen it all — from the sharp upside volatility Feb./Mar. 2022 to
the final end of COVID-Zero policy in China, concerns over a banking crisis — and now a ‘surprise’ cut from OPEC+ just yesterday. Even with
the recent tumult, our bullish view on oil in 2023, particularly in 2H23, remains steadfast. Our key views include 1) solid global demand growth
even in a slower economic backdrop, led by recovery in China; 2) a continued degradation in the outlook for US Shale production; 3) low global
inventories (even after meaningful 1Q build); and 4) the lack of a geopolitical premium in oil prices, coupled with very low speculative positioning.

Overall, fundamental inventory builds in 1Q23 turn to much larger draws in 2H23 from non-OECD demand growth (mostly China and India), while
continued capital discipline from public E&Ps, OPEC+ cuts, Russian sanctions, and depleted strategic inventories keep a relative lid on a potential
supply response. Our updated price deck calls for WTI averaging ~$90 for 2023, with our model peaking in 4Q23 at $105. Even under an
OECD recessionary scenario, we can remain bullish of structurally higher “recessionary crude” prices between low global inventories (and the
need to replenish inventories), growth of non-OECD demand, gas-to-oil switching, and continued global upstream underinvestment between
tighter lending standards and macroeconomic concerns.

Summary Version:
Large 1Q23 Inventory Builds Turn Into Even Larger Inventory Draws in 2H23. The most bearish period for our oil model in
the past few years has always pointed to 1Q23. Our previous update called for 0.7 MMBPD of builds in 1Q23 with over 1 MMBPD of draws in 2H23.
The much more mild winter in the Northern Hemisphere and better than expected Russian production combined to cause 1Q23 actual inventory
builds closer to ~1.3MMBPD, with the two factors mentioned driving the bulk of our forecast ‘miss’ as other factors have largely canceled out.

Even with meaningfully bigger builds in 1Q23, OPEC+’s surprise cut pushes us to draws in 2Q23, before we see massive draws of well over 1 million
bpd of draws in 2H23 as the demand ramp (+3 million bpd from 1Q23 to 4Q23), led by China, overwhelms another step higher in our Russian
production forecast (average 10.6 MMBPD vs. 10.1 MMBPD prior). The table below summarizes our bullish 2H23 view.

RJ's oil price forecast by quarter for 2023
Q1: $76
Q2: $80
Q3: $95
Q4: $105

This is the key to RJ's high oil price forecast: Global and especially OECD petroleum inventories are below normal (despite building in Q1 2023) and now expected to decline much further in 2H 2023, barring a MAJOR GLOBAL RECESSION. Diesel inventories are the most important to OECD economies.

From today's RJ oil price forecast:
"Crude Draws in 2023 Pull From Already Low Global and U.S. Inventories. Since 2020’s peak, global inventories have decreased by nearly 1
billions barrels and remain 250M barrels below 2019’s average with US crude, distillate, and gasoline inventories also showing a similar trend.
Inventories built in 2H22/1Q23, though we’re seeing solid evidence of a much more balanced market for 2Q23 (we model slight builds). Further,
our outlook calls for significant inventories draws (>200M barrels) in 2H23 due to Chinese demand recovery, seasonal demand improvements
ex-China, and a decline in OPEC and Russian production. Overall, we see inventories down ~250M barrels y/y which would put 2023 inventories
below 2022’s low of ~6.3 billion barrels. Core OPEC now does have spare capacity in its system, but very active market management likely pushes
a higher floor for oil prices, while true capacity is likely understated capacity due to underinvestment with geopolitical instability and concerns
over operational disruptions in some OPEC nations. Politicians may feel the need to release further inventories from Strategic Petroleum Reserves
(SPR) to tame high gasoline prices when the U.S. should be re-filling its SPR — but it’s not — increasing the worry that the U.S. is not prepared
for a major supply disruption. < MY TAKE: If we have to keep drawing oil from the SPR it will put the U.S. in "dangerous territory" and unable to respond to a major supply disruption, which was why the SPR was created. Draining the SPR for political gain shows the ignorance of our current leadership team.