Oil Price Forecast (Wells Fargo) dated May 27

[dan_s]

International E&P
Oil Macro: Preponderance of Evidence Supports Cautious Outlook

Our Call
Oil markets have priced in a greater perceived risk of over than undersupply into mid-2026. Decelerating US shale growth allows OPEC+ to slide into the driver's seat. Now they must carefully steer between market share gains or price stability.

Key Takeaway. In our last oil macro note (3/19), we posited that OPEC+ has shifted to market share over price support. Given the impact of this switch (plus tariffs), oil prices have fallen to the low $60s/bbl, and E&Ps have trimmed capex and D&C plans. Kazakhstan, a consistent quota exceeder, has apparently reached its maximum production. With a changed balance of power, we would not be surprised to see OPEC+ consider a slower-walk approach to the next round of production increases.

Price Deck Reduced. Despite believing OPEC+ could ease its production expansion, to date their actions imply otherwise. Thus, we lower our oil price deck from 2025 through 2027. The impact of lower prices will curtail production capacity by 2027. Thus, we expect prices will exceed $80/bbl by H2'27. Key issues for supply and demand include recession vs growth (taxes, regulations, tariffs/trade), sanctions (Iran & Venezuela), Russia/Ukraine cessastion and OPEC+ cohesion.

What Saudi Arabia Wants Is Most Likely What We'll Get. OPEC is more than just Saudi Arabia. However, the country has often referred to its position and role as the "central bank" of the global oil markets. In reality, Saudi Arabia has often demonstrated a commitment to market stability with production swings (up & down) up to and exceeding 2.0mmbpd within 12-month periods multiple times since 2000. Saudi Arabia has walked the talk when it comes to global oil market equilibrium.

Our updated price deck forecast presumes Saudi Arabia does not want/need an oil price collapse. to achieve its goals. However, we do expect OPEC+ to consistently lift production until an overshoot (e.g., lower oil prices and rising inventory balances) manifests. They'll know they went too far when oil falls below $50/bbl. Thus, we expect crude oil prices to continue falling and then remain in the low- to mid-$50/bbl range through mid-2026.

A Deal with Iran Would Be Very Surprising. It would also clearly be negative for oil prices. We set the likelihood of an agreement near zero. Compromise is possible, but we see the key issue (nuclear enrichment) as a bridge too far for both sides. Namely, Iran wants to maintain uranium enrichment, while the US demands zero enrichment. Two countries that gave up their nuclear weapons (Ukraine) or weapons research (Libya) likely regret doing so. Iran's leadership has likely learned that lesson.
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MY TAKE:
> I believe (maybe false hope) that WTI will drift higher once the FEAR of the Trade War fades and the Republicans pass some version of the Big Beautiful Bill, so we have some certainty about income tax rates.
> U.S. and OECD Petroleum inventories are below normal for this time of year. There is no "glut" of oil that needs to be worked off.
> Demand for transportation fuels seems to be holding up.
> All of our Sweet 16 companies will be fine if WTI averages in the low $60s all year. The U.S. natural gas price today is $3.55/MMBtu, which is 38% higher than it was a year ago. NGL prices are also higher than they were a year ago. So, higher natural gas and NGL prices offset most of the "pain" of lower oil prices.
> The Gold to Oil ratio is way out of whack, over 53/1 today (historical normal is 20/1). The last time this happened was early 2020, the first year of the Covid 19 Pandemic that caused the largest decline in oil demand EVER. From April 2020 to early February 2022 (before Russia invade Ukraine) the price of WTI oil went from $18 to $87.
> My opinion is that WTI will EVENTUALLY move back into the "Right Price" range of $75 to $85. How long "EVENTURALLY" lasts is the Big Question.

[dan_s]

Watch the 6 minute interview at this link:
https://www.msn.com/en-us/money/markets/summer-demand-could-support-opec-output-increases-say-analysts/ar-AA1FHq5w

Oil Fundamentals show a much tighter global oil market that the current paradigm. Based only on current U.S. and OECD inventories based on Days of Demand, the price of Brent should be $85/bbl.