Oil Price Forecast - June 6

[dan_s]

I have subscribed to Keith Kohl's newsletter for over a decade. I agree with him about 98% of the time. His comments below are in lockstep with my view that the recent pullback in WTI is a knee jerk reaction by oil paper traders to OPEC's June 2nd announcement, which looked bullish to me. I expect WTI to be back over $80 by the end of June.

Why Oil Prices Are Falling
KEITH KOHL | JUN 06, 2024

Most investors are probably wondering why oil prices have been falling recently.

I get it, I really do. Earlier this week, we talked about the turning market sentiment on its outlook for oil stocks as crude prices sold off sharply. What we saw was the market reacting badly to the OPEC+ meeting earlier this week, with sellers running for the nearest exit they could find.

Let me tell you this — the market is wrong.

I know, I know... markets are never wrong, only opinions. They are precisely where they should be at any given moment. I won’t argue quips, but I will take advantage of those infallible markets when I see them.

That’s why I’m buying oil today, and so should you.

Here’s why…

Falling Oil Prices Breed Opportunity

Look, you don’t need me to drag out old, overused Baron Rothschilde quotes about blood in the streets.

There’s no question that the oil markets were stained crimson recently, and even I’ll admit there could’ve been catalysts that would make me shy away from buying right now. In fact, there were a number of events that could have taken place that would’ve immediately drained the bullish feeling right out of me.

But one thing is for certain, it wasn’t the OPEC+ decision that would do it. Again, we talked about this last time, and I’m not convinced it was the mind-blowing event that changed the global supply picture going forward.

Remember, the Saudis are not aggressively gunning for $100/bbl oil like most people think. They’re perfectly content with oil in the $80-90/bbl range. But you can sure as hell bet they’re going to defend prices as they dip into the low $70s.

My point is that the gradual easing of those production cuts will never occur in a low-price environment. The cuts, which total around 3.66 million barrels per day, will remain in effect through 2025 as the group takes a ‘wait and see’ approach.

There’s more you should be focusing on than just fantasies of OPEC+ barrels flooding the market a year from now.

The latest EIA weekly oil numbers showed an interesting story. While analysts were expecting to see crude inventories start falling, the EIA reported a surprise build of 1.2 million barrels in our oil stockpiles.

But again, the devil is in the details here.

I don’t think this report was as bearish as most believed, nor did crude deserve the sell-off that took place.

The most glaring point that stuck out immediately was the return of the mysterious adjustment number. For those of you that haven’t come across this previously, the EIA posted another large adjustment to crude oil supply; this week it was 466,000 barrels per day.

If you’re confused as to where this oil is coming from, get in line. The EIA has been notoriously obscure with this figure, and it’s certainly not a new phenomenon.

That’s nearly half a million barrels per day adding to the surprising build we saw. Keep in mind that this occurred during a period when refinery throughput reached 17.1 million barrels per day.

Perhaps the market can only be wrong when it gets clouded numbers?

Meanwhile, U.S. domestic output according to the EIA remained flat around 13.1 million barrels per day.

More important, however, is how our demand is shaping up. Go ahead and take a look at the EIA’s latest figures on the amount of products supplied:

Even though total petroleum demand rose to 20.5 million barrels per day, gasoline and diesel demand were still weak. The question right now is whether gasoline demand will start to pick up momentum as we head through the summer months.

There is another curveball thrown in a potential bullish rally for oil prices — good, old, geopolitical volatility.

I know most people’s attention has shifted away from the Russia-Ukraine war currently raging, but we saw something happen this week that we haven't seen before.

For the first time, Ukraine used U.S. weaponry to launch a strike inside Russia. Up until now, Ukrainian forces were only allowed to use U.S. arms for defensive purposes. It turns out that President Biden lifted that restriction last week, and Ukrainian forces took full advantage of it.

The question now is how Putin will take this new development. He warned that using Western weapons to make strikes inside Russia was a dangerous step and sees it as direct involvement in the war.

If you’re like me and you’ve been looking for a buying opportunity to present itself, I can’t think of a better time to take advantage of an oversold oil market.

Until next time,
Keith Kohl

PS from Keith:
The "Horseshoe Well" Is Set to Reshape the $4 Trillion Oil Industry
> A new drilling technique is sending shock waves through the American oil patch.
> The Journal of Petroleum Technology says this revolutionary method is "a design unlike anything most have seen in the shale sector before"...
> And it’s set to kick off a wave of profits that could make the fracking boom look like child’s play.
Vital Energy (VTLE) recently reported strong Horseshoe well results.

[dan_s]

Trading Economics:

WTI crude futures climbed over 2% to $75.6 per barrel on Thursday, continuing their upward trend for a second consecutive day after hitting a four-month low of $73 on Tuesday.
> The increase was fueled by the European Central Bank's first interest rate cut in five years and market speculation that the Federal Reserve will follow suit in September. The ECB reduced its key interest rates by 25 basis points, citing progress in combating inflation but warning that the battle is not yet over.
> Additionally, soft US jobs data on Wednesday raised hopes that the Federal Reserve might cut interest rates twice this year. The likelihood of the Fed lowering borrowing costs in September is now at 69%, a move that could stimulate economic activity and boost oil demand.
> Earlier in the week, oil prices had been under pressure after OPEC+ agreed to extend most of their supply cuts into 2025 but allowed for voluntary cuts from eight member countries to be gradually unwound starting in October.

US natural gas futures pared gains to $2.8/MMBtu, after EIA reported a bigger-than-expected storage build. US utilities added 98 billion cubic feet of gas into storage last week, above market expectations of an 89 bcf increase. Also, the report showed US gas stockpiles are 25.1% above the 5-year average.
> Despite this, natural gas prices have risen over 7% this week due to a recent drop in output and forecasts for hotter-than-normal weather later in June.
> Gas output averaged 98.0 billion cubic feet per day (bcfd) in early June, down from 98.1 bcfd in May, with a preliminary daily low of 96.3 bcfd on Thursday.
> Overall, US gas production is down about 9% in 2024 as energy firms like EQT and Chesapeake Energy delayed well completions and reduced drilling when prices fell earlier in the year.
> Meteorologists expect warmer-than-normal weather through June 21, except for some near-normal days from June 7-12.

[aja57]

We can only hope Wall Street talks up those Horseshoe wells like they talk up NVIDIA chips. Would be nice to see E&Ps trading at 68x trailing earnings and 44x forward earnings. Can you imagine if Diamondback or even Exxon made up 47% of the SP 500 gains to date ? Oh we can dream…