Energy Prospectus

As I explained during my Saturday podcast (Jan 20) I believe that the WTI oil price will average ~$75/bbl in Q1 and then ramp up to $80/bbl in Q2 due to the seasonal demand spike (over 2 million bpd) that happens each year during Q2. Barring a significant global recession, this annual demand spike happens because humans like to travel and transportation fuel demand increases with spring weather.

Also, as I have pointed out many time, IEA's year-over-year demand increase forecast is too low. From IEA's initial 2024 oil demand forecast of 0.9 million bpd increase YOY that came out several months ago, they have already increased it twice to 1.2 million bpd. OPEC's YOY demand forecast is 2.2 million bpd for 2024.

Note today from HFI Research:
As we wrote last week Thursday, the oil market is simply too bearish. From CTA positioning, global inventory changes YTD, OPEC+ exports, and the physical oil market, the market is too bearish on oil.

To make matters worse, IEA published its latest oil market report last week Thursday pointing to surpluses for the rest of the year.

The caveat to this forecast is that 1) it assumes OPEC+ starts to unwind production cuts from Q2 2024 and onward, and 2) assumes anemic demand growth in OECD.

Even if we assume IEA is correct for a moment here, the assumption that OPEC+ will unwind the production cuts by Q2 appears to be premature. If, in theory, IEA is correct that the surplus shoots up to ~1 million b/d by Q2, OPEC+ will likely prolong their cuts, thus balancing the market.

But taking this point aside, we think IEA is far too bearish on OECD oil demand. In IEA's latest forecast, it has OECD oil demand falling 0.1 million b/d versus 2023. This is following a zero growth year in 2023 vs 2022. We believe this assumption assumes that Europe will remain in recession, despite the steep fall in natural gas prices, and the US economy further worsens. In addition, this does not assume what will happen to the US economy if 1) inflation starts to normalize and 2) the Fed starts to cut.

It's safe to assume that IEA's demand assumption for OECD is about as bearish as it gets. We are of the view that OECD demand will increase by ~500k b/d this year, which would jolt balances to the deficit.

Trading Economics:
Oil
"WTI crude futures rose more than 2% to over $75 per barrel on Monday, driven by supply disruptions and strong demand. Israel's offensive in Gaza and attacks on commercial vessels by Iran-aligned Houthis persist despite US retaliation. Additionally, Russian energy firm Novatek halted operations at its Baltic Sea export terminal due to a fire reportedly caused by a drone attack, now extinguished. Meanwhile, Libya's National Oil Corp. announced the restart of flows from Sharara, pumping 270,000 barrels per day after a three-week halt. On the demand side, the IEA revised its 2024 oil demand growth projection to 1.24 million barrels per day, up by 180,000 bpd, citing improved economic growth and lower crude prices in Q4. OPEC also maintained its forecast of 2.25 million bpd demand growth in 2024, with a strong expectation of 1.85 million bpd growth in 2025."

In my opinion, WTI price risk is to the upside. Direct military action by the U.S. against Iran appears more likely each day.

Natural Gas
"US natural gas futures fell below $2.4/MMBtu on Monday, hitting a month-low after a 24% decline last week, driven by warm weather predictions for late January and early February. Additionally, output is expected to increase after falling to a 12-month low last week mainly due to freeze-offs. Despite this, the amount of gas flowing to US liquefied natural gas (LNG) export plants recovered from a one-year low. Meanwhile, government data showed US utilities pulled 154 billion cubic feet of natural gas from storage in the second week of January, less than market expectations of a 164 bcf decrease. The report also showed gas in storage remains 11.2% above the seasonal norm."

Two things to watch for:
> EIA should report a BIG DRAW from storage for the week ending January 19th. The storage surplus to last year should be gone in a few weeks.
> Winter is far from over. Joe Bastardi's is forecasting much colder than normal weather in the eastern half of the U.S. starting February 4th and extending into March. Watch Joe's Saturday Summary here: https://www.weatherbell.com/premium/

Q4 natural gas prices (HH averaged over $3.00) were the highest for the year. All of our gassers are going to report strong results for Q4.