Energy Prospectus

Oil Strategy: Raising The Floor Published September 7 2023 00:45:00 EDT

Price Revision & Fundamental Market Outlook
Oil prices have surged meaningfully higher over the summer, fueled by firming
physical crude balances and led by even stronger refined product markets.
Messaging from the Kingdom earlier this week is a stark reminder to short sellers
to not position against the Central Bank of oil. Some may argue that the recent
physical market tightness is artificial rather than organic market forces at work. The
fact that cracks led the oil complex higher this summer was clearly indicative of
strong demand stemming from a resilient and relatively price inelastic consumer (so
far) rather than purely a Saudi-led supply-side push. We see WTI and Brent prices
averaging $86.50/bbl and $91.00/bbl in the final quarter of this year.

We believe the following to be largely true: 1) The physical market is the healthiest
it has been in 12 months; 2) The oil market often undershoots and overcorrects, and
considerable length remains sidelined and the strong tape could set off a further
chase and catch up; 3) This market is already priced for perfection, and that acute
upside catalysts are difficult to foresee at the moment; 4) The price floor has been
lifted and that dips will likely see support.
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THIS IS EXTREMELY BULLISH because RBC Capital is one of the "Alpha Dogs" when it comes to commodity forecasts. Most of the Wall Street Gang is a herd that just follows the Leaders. Goldman Sachs also making bullish comments.

Send me an email if you'd like to read RBC's full report (11 pages): dmsteffens@comcast.net

Note from Adam Rozencwajg

Global energy demand continues to surprise to the upside, and even the IEA has raised its estimates. For example, at the end of 2022, the IEA estimated global oil demand in 2023 would average 101.6 mm barrels per day -- a significant 1.7 mm increase over 2022. In their June “Oil Market Report,” the IEA raised their 2023 demand estimate by an additional 700,000 b/d, with the bulk of their underestimation again coming from China. Since the end of 2022, the IEA has raised its Chinese oil demand estimates by 400,000 b/d. < RBC Capital says they expect IEA to raise their 2023 demand forecast again when their September report comes out next week.

Responding to global recession worries, the IEA reduced global oil demand by 200,000 b/d in its July 2023 OMR. However, we believe the IEA is still radically underestimating global oil demand and that further upward revisions must be made. For example, the IEA has 1.3 mm b/d of missing barrels in its first quarter 2023 balances. Our readers know that missing barrels represent the excess of supply less demand that are missing—literally-- they can’t be found in global inventories. Historically the IEA has made missing barrels disappear by revising global demand upwards, and we believe this time will be no different. We believe the weakness in oil prices in the second quarter can’t be explained by faltering demand.

We believe the primary weakness in global oil prices in the second quarter is unexpected supply issues.

In the final week of March, the US government began selling an additional 26 mm barrels of Strategic Petroleum Reserve oil under previously legislated Congressional mandates. All 26 mm barrels had been sold by the last week of June. Over the next four years, the DOE, under Congressional mandate, was scheduled to sell an additional 155 mm barrels of oil out of the SPR—42.5 mm barrels in 2024 and 2025 and 35 mm barrels in 2026 and 2027, and these sales would represent almost 50% of the remaining SPR reserve.

In July, however, the DOE announced the cancellation of these sales as part of the attempt to begin “refilling” the SPR. Over the last 18 months, 330 mm barrels have been released by US, European, and Japanese SPR and have been 100% responsible for the slight build we’ve seen in commercial inventories. Given July’s DOE announcement, SPR sales will be zero over the next four years, which we believe has already begun impacting oil prices. We think it’s no coincidence that oil prices rebounded almost 18% since the last week in June—just as US SPR releases wound down.

SPR sale cancellations, combined with rapidly slowing production growth from the Permian basin and unexpected production cuts from Saudi Arabia, mean that commercial inventories will experience rapid drawdowns in the second half of 2023.
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Raymond James is also forecasting that OECD Petroleum Inventories will fall to 22 Days of Consumption. They have NEVER been that low.