Energy Prospectus

By Keith Kohl | Nov 19, 2024

Strange things are taking place in global oil markets.

To the casual observer, all is well as WTI crude prices this week are once again fighting to breach $70 per barrel; Brent crude is struggling to break $75 per barrel.

Look a little deeper, and you’ll find the situation is getting quite interesting.

For years, OPEC and the IEA have been battling back and forth in the media, each putting out their own overly bullish and bearish forecasts to counter the other in a never-ending spat.

However, things lately have been feeling a bit… upside down?

At least, that’s the feeling you might get after watching OPEC’s latest downward revision for global oil demand growth for 2024, then lowering its outlook for demand growth next year.

Meanwhile, the IEA came out and actually raised its forecast for this year, now believing that global demand will rise by 921,000 barrels per day in 2024. In fact, current IEA projections are for global demand to hit 102.8 million barrels per day this year, then climb to 103.8 million barrels per day in 2025.

Next thing you’re going to tell me is that President Biden is the one pushing us closer to World War III… surely that would never happen, right?

Right now, there are just two factors deciding the fate of oil prices in the near-term.

If you’re wondering what would make both the IEA and OPEC start revising their projections, the first place to look is China. Both see lackluster demand ahead for the Middle Kingdom, and the country’s recent debt package of 10 trillion yuan hasn’t given either much confidence.

Keep in mind that Chinese crude imports are still averaging around 10.8 million barrels per day, which is down about 3% year-over-year.

However, this is going to have a much different effect than most people think.

You see, OPEC may be playing a different kind of game. By lowering their demand forecast, OPEC is giving itself a reason to nix their plans to delay their output hike in December and keep the production cut deal in place.

Remember, unwinding those production cuts was supposed to happen in October. Nearly everyone is expecting to see them raise output in December… I’m not so certain anymore.

And then we have the second catalyst supporting oil prices — good, old-fashioned geopolitical mayhem.

The moment President Biden authorized Ukraine to use U.S. missiles to strike deep into Russia, higher crude prices were all but guaranteed.

But hey, why worry about the consequences when you can just leave them for the next guy?

That news alone is what’s buoying crude prices today, and makes it a bit more difficult for a swift end to that war that President Trump has promised.

The dirty little secret to U.S. oil stocks most investors don’t realize is that we don’t need oil prices over $100 per barrel to make a tidy profit in the sector. In fact, most of those U.S. oil players are more than capable of making a decent return with prices at $70.

Why?

Because the days of a debt-fueled drilling frenzy are long gone. They’ve been replaced by operators that are getting every drop of oil they can out of the ground while spending less and drilling fewer wells.

Until next time,
Keith Kohl

MY TAKE:
I was interviewed on a radio show based in Vancouver today.
> Canadians are afraid that Trump's promises of "Drip Baby Drill" will lower oil prices. I reminded them that the U.S. does not have a federal upstream oil company. Trump has no control over any companies in the supply chain that supply us with the oil-based fuels and products that give us a high standard of living.
> None of the companies that I follow will go back to outspending cash flow to lower oil prices. If they do, they will go the Wall Street Penalty Box.
> Drilling & Completion budgets will only go up in response to higher oil & gas prices.
> Trump's plans to downsize the Federal government and decrease regulations that add unnecessary costs for upstream companies will help improve well-level economic, but it will not happen quickly.
> WTI is currently in a range of $67 to $72. All of our companies are profitable and free cash flow positive at that price, especially because rising natural gas & NGL prices are offsetting the lower oil prices. Q4 results are going to be good.
> OPEC+ will not increase production quotas unless they are sure that the global oil market needs more oil. They will increase quotas when Trump shuts down Iran's oil exports. Saudi Arabia is happy that Trump will soon crack down on Iran. Biden's presidency is why we have war in the Middle East.[/color]

EIA's Oil and Gas Price forecast from: https://www.eia.gov/outlooks/steo/

Global oil inventories and prices. We expect that ongoing geopolitical risks and withdrawals from global oil inventories stemming from OPEC+ production cuts will place upward pressure on oil prices over the next few months, with the Brent crude oil price averaging $78 per barrel (b) in the first quarter of 2025 (1Q25). However, we forecast that global oil production growth means inventories will begin building in 2Q25, reducing crude oil prices through the end of the year. We expect the Brent price will fall to an average of $74/b in the second half of 2025. < WTI prices will be about $3/bbl lower than Brent prices.

Natural gas prices. We expect the Henry Hub natural gas spot price to rise in the coming months to average $2.80 per million British thermal units (MMBtu) in 1Q25, following seasonal patterns during which prices typically rise during the winter. The monthly average Henry Hub daily spot price fell to $2.20/MMBtu in October and below $2.00/MMBtu in early November. Low prices reflected warm temperatures, which could delay the beginning of withdrawals of natural gas from storage until mid-November. We expect the Henry Hub price to average around $2.90/MMBtu in 2025, as global demand for U.S. liquefied natural gas exports, a component of U.S. natural gas demand, continues to increase. < Unless we have another warmer than normal winter, U.S. natural gas prices will be over $3.00/MMBtu in Q1. JAN25 closed at $3.19 today.

Note from HFI Research this morning (11-20-2024):

Last week, we updated our E&P spreadsheet (the link is only available for paying subscribers) to reflect cash flow generation at $70 and $75 per barrel WTI. We found that E&Ps currently discount WTI in the mid-$70s per barrel. Prices above that level would cause E&P free cash flow to surge higher. Free cash flow would be returned to shareholders, and E&P stocks would trade well above current levels.

Recent news flow in the oil market suggests that higher oil prices are imminent, as data consistently points to a more constructive supply/demand balance than what is implied in consensus expectations.

We expect the positive news to continue. Investors should consider buying E&P stocks now before a shift in the fundamental outlook and investor sentiment sends their prices significantly higher.

For months, oil prices have been held down by the consensus narrative that 2025 oil market balances will be too loose for comfort. The narrative is captured in the IEA’s November 2024 Oil Market Report, published last Thursday, which forecasts an ugly 1.1 million barrel per day oversupply for 2025.

The IEA is the oil market’s de facto benchmark for the consensus outlook, particularly with regard to supply, so we understand investors’ reluctance to buy E&Ps in the face of such massive projected inventory builds.

Oil prices have moved lower in anticipation of these builds. In fact, prices have undershot levels implied by inventories to a degree rarely seen over recent years, as shown below.

The WTI price is discounting more than 100 million barrels of inventory builds, equivalent to an annual build of 274,000 bbl/d.

The mega-builds forecasted by the IEA are set to begin in January and remain in effect throughout all of next year. By year-end, they imply that 300 to 400 million barrels of excess oil supply will have to be worked down before fundamentals justify a WTI price above $80 per barrel.

Reality Will Play Out Differently

Barring a deep global recession and/or OPEC’s abdication from market management, the IEA's forecasts strike us as ridiculous. By our estimates, the IEA’s oversupply is inflated by more than half.

Wilson discussed the problems with the IEA’s 2025 forecast in an update published last Thursday. He concluded that the agency included at least 300,000 bbl/d of excess OPEC+ supply growth and an additional 250,000 bbl/d of overstated U.S. production. Adjusting the forecasted oversupply for these factors brings the projected oversupply down by half to 550,000 bbl/d.

In the days since Wilson’s update, additional data have come to light that cast further doubt on the IEA’s 2025 supply forecast.