Oil Price: Comments from HFI Research

[dan_s]

From HFI Research at 12:57 on April 4 with my comments in blue.

What happens if WTI averages $60/bbl the rest of the year?

If WTI manages to stay around $60 amidst this chaos, then you can say goodbye to the drill baby drill narrative. < As I have posted here many times, "Drill Baby Drill" will not happen with falling oil prices. If WTI goes to $50/bbl, half of the drilling rigs will be shut down within two months and U.S. oil production will fall quickly.

Based on our latest model, US crude oil production will fall to average ~12.75 million b/d with an exit closer to ~12.4 million b/d. < 1.0 million b/d lower than the 2024 exit rate.

Associated gas production will fall by ~2.5 Bcf/d, which would push Lower 48 gas production down to ~104 to ~104.5 Bcf/d by year-end. < Lower oil prices are actually bullish for the U.S. natural gas market and lower gas production in the Permian Basin would probably raise the natural gas price in the region.

Aside from the possibility that LNG exports get smacked alongside everything else the US exports, US natural gas market is going to be one of the more interesting markets for the rest of the year if production disappoints to the downside. < I agree. Natural gas prices are still over $12/MMBtu in Asia and Europe. LNG exports will remain high. Summer demand spike for power generation is just a few months away and the AI data centers still need to be built.

On the demand side, tariff uncertainty, whether implemented or not, is going to be negative for oil demand. Businesses will throttle back investments in the event that Trump restarts tariffs, but I think the negativity from this will be offset by the fiscal stimulus spending from China and Europe.

As for US oil demand, I fully expect weaker growth as I think businesses will be reluctant to spend/invest/hire amidst all of this uncertainty.

On the supply side, OPEC+ increasing production early definitely sent mixed signals in the market. But with prices where they are now, non-OPEC supply growth is all but certain to disappoint to the downside. And since tariffs are not yet implemented and only marginal demand growth is impacted, the impact on inventory balances may be negligible.

All-in-all, based on everything I know today, these are the concrete conclusions I can reach:

US crude oil production will fall this year versus the growth everyone expects. < Many investors still hold the False Paradigm that U.S. oil production will keep growing year-after-year. Even if WTI goes up to $100/bbl, supply growth will be limited by the geological fact that most of the Tier One leasehold has been drilled.

Relatively speaking, oil demand growth this year will be weaker than previously expected, but if the tariffs aren't implemented, then it will be marginally lower.

Non-OPEC supply growth will disappoint materially to the downside.

Conclusion
The market may inevitably force Trump or other countries to fold, but it's likely to get worse before it gets better. The math behind the tariff is so asinine that it makes you think all of this is just a joke. But logic seldom exists when people are panicking, and given the size of the liquidation we are seeing across the board, calmer heads won't return until there's more clarity around the tariff situation.

I reason that this whole situation won't last because it's too damaging to all parties involved (similar to the oil price war in 2020). Cooler heads will prevail, but the market may need to force that on them.
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MY TAKE, which is just a Wild Ass Guess at this point, is that this morning's selloff of the front month NYMEX contract for WTI (MAY25) is that a lot of the Paper Traders got margin calls this morning. They had to close long positions at any price. They lost money, but they can roll the positions forward and earn it back if the FEAR of the tariff war is much worse than the reality.
> The hard bounce off of $60.60 at 9:45AM ET this morning, with the spike up above $62.50 should set a support level. Maybe some sanity will be restored over the weekend. Let's hope so.
> Before this nonsense started WTI was over $72/bbl on Wednesday morning, which is where the fundamentals said it should.
> This is why knowing each company's production mix and their hedging programs is important during times of uncertainty.

Notice that HFI did not mention the strong possibility of the U.S. shutting down Iran's oil exports. I think that Saudi Arabia is aware of the U.S. military buildup in the region and what shutting down Iran's oil exports will do.

[ChuckGeb]

My hunch on the OPEC announcement is that there was a deal made with Saudi because Trump's plan in addition to Drill Baby Drill is "Bomb Bomb Bomb Iran". Time will tell. I don't think it is going to be that long. Purely speculation but if you listen to what Trump says and realize he is the ultimate multi tasker it makes sense. I don't think the Sauds will live with $60 oil for too long.

[mrbill]

3 US Carriers in the Gulf area now. Israel has 2,000 lb. bombs. Something is coming soon.