Energy Prospectus

Trading Economics:

Oil
"WTI crude oil futures slumped 5% toward $70 per barrel on Tuesday, after reports suggested that Israel might avoid targeting Iran’s oil infrastructure, alleviating fears of a major supply disruption in the region. Israel indicated it may heed US warnings and focus on military rather than energy targets in Iran, though tensions remain high. Also, the IEA cut its demand growth forecasts, citing near-record spare capacity in OPEC+ and slowing demand in major markets like China. World oil demand is projected to increase by just under 900,000 bpd in 2024 and 1 million bpd in 2025, marking a slowdown from the 2 million bpd growth seen after the pandemic. Chinese oil demand is particularly weak, with consumption falling by 500,000 bpd in August for the fourth consecutive month. Meanwhile, crude production in the Americas is expected to rise by 1.5 million bpd this year and next. On Monday, OPEC lowered its global oil demand forecast for 2024 and 2025 for the third consecutive month."

Natural Gas
"US natural gas futures plunged to $2.48/MMBtu, extending their decline from a three-month high of $3 as bearish sentiment continued to dominate. Hurricane Milton significantly reduced demand in Florida by causing widespread power outages, while mild weather across much of the US further curbed demand. Despite the EIA reporting a smaller-than-expected storage injection of 82 Bcf, offering modest support, robust supply levels kept prices under pressure. Investors remained cautious, recognizing that demand destruction from the hurricane could offset potential gains from colder weather. Forecasts for cooler temperatures in the Midwest and Northeast provided some stabilization through short-covering."
------------------------
Price volatility likely to continue as there is much uncertainty around what Israel and Iran will do next.
My forecast valuation models are based on WTI averaging $70/bbl and HH Ngas averaging $2.75/MMBtu in Q4.

Advice from HFI Research this morning:
-------------------------
I think I speak for everyone when I say that I'm a little too old for this crap. Oil trading is now just a bunch of algos trading news headlines like a ping-pong match. Just two weeks ago, President Biden blurred out "accidentally" that Israel was contemplating a strike on Iranian oil facilities, which resulted in oil surging.

As I woke up this morning (Tokyo), I saw that oil has crashed again following a news report from the Washington Post that Israel will only strike military targets.

I am getting a little too old for this. Geopolitics are nothing but a distraction for the oil market. I have long viewed this as a reason why readers must always keep a close eye on fundamentals to determine whether or not oil prices are overvalued/undervalued. In the case of the oil market today, fundamentals support prices. But this doesn't prevent it from being whipsawed back and forth from the never ending headlines.

But for readers trying to gain clarity on the future of the oil market, I strongly advise you to focus on what's important. While the battle of the headlines won't be ending anytime soon, it represents a great opportunity for those that 1) focus on quality energy businesses and 2) take a longer time horizon.

Look past the noise, and focus on where we are going...

Tomorrow's oil storage report is likely to show a build of crude oil inventories by 3 to 4 million bbls, which is normal for this time of year.

I am traveling today. Sitting in the Phoenix airport waiting for my flight to Orange County.
It will be nice if WTI can close near $71 as that is the strongest support level.

Trading Economics
Oil
"WTI crude oil futures slumped 4.4% to $70.6 per barrel on Tuesday, after reports suggested that Israel might avoid targeting Iran’s oil infrastructure, alleviating fears of a major supply disruption in the region. Israel indicated it may heed US warnings and focus on military rather than energy targets in Iran, though tensions remain high. Also, the IEA cut its demand growth forecasts, citing near-record spare capacity in OPEC+ and slowing demand in major markets like China. World oil demand is projected to increase by just under 900,000 bpd in 2024 and 1 million bpd in 2025, marking a slowdown from the 2 million bpd growth seen after the pandemic. Chinese oil demand is particularly weak, with consumption falling by 500,000 bpd in August for the fourth consecutive month. Meanwhile, crude production in the Americas is expected to rise by 1.5 million bpd this year and next. On Monday, OPEC lowered its global oil demand forecast for 2024 and 2025 for the third consecutive month." < US oil production has been lower than it was in December, so I wonder were the 1.5 million bpd increase is coming from this year.

HH natural gas down a cent today. Colder forecast for large area of the central US should help reduce the storage surplus.

JP Morgan put out a note on 10/15 re crude inventories and price (Brent). Interesting that global inventories are lowest since 2017, but price forecast is for a decline in H2 2025. Apparently they are in the camp that 2025 will see increasing production outweigh increase in demand.

Key Takeaways:

Since the outbreak of the conflict in Gaza last October, spikes in oil prices have been short-lived as oil production has largely been undisrupted — but this could change if Iranian energy infrastructure is damaged.

In addition, global oil inventories are much lower today, currently standing at 4.4 billion barrels — the lowest on record since January 2017.

Overall, J.P. Morgan Commodities Research forecasts Brent could average $80/bbl in the fourth quarter of 2024 and $75/bbl in 2025, declining to the low $60s by end-2025.

https://www.jpmorgan.com/insights/global-research/commodities/oil-price-forecast

With US and OECD petroleum inventories lower than normal for this time of year, I keep thinking that "forces" are working to keep oil prices lower than supply/demand fundamentals should be pushing it. Might have something to do with the election.

I also find it odd that Saudi Arabia would increase exports to lower prices. It is not in their national interest to do so.

If WTI stays over $70, all of our model portfolio companies will be fine. EIA's forecast is $73 for 2025.

I'm on my way back from SoCal. The conference I spoke at was upbeat. Lots of investors interested in private drilling programs. Rich people hate paying taxes and with almost no subeconomic wells these days over a $100 million was committed today to two Texas drilling programs.

Skyway Capital Markets sponsored the conference: https://skywaycapitalmarkets.com/team/capital/

If JPMorgan is right (hopefully not), and Brent goes into the low 60s in 2H 2025 (meaning WTI is in the 50’s) those investors may be disappointed.

Agree, it sure seems that there’s a significant disconnect between inventory levels/production and demand vs price of crude. Will be interesting to see what happens after the election. Forecasts of significant production growth globally seem optimistic until I hear about big investors looking to fund new projects.