Energy Prospectus

Oil prices showed gains in recent days and held onto them to start off the week. There is growing confidence in an OPEC extension and also there are finally some signs that the market is tightening. < IMO the odds of OPEC extending their agreement to curb production through year-end is 98% that they will extend the agreement. The downside for the cartel is very big, as explained in the newsletter. - Dan

OPEC: Inventories starting to decline. The head of OPEC says that the production cuts from the cartel are starting to bear fruit. “I remain cautiously optimistic that the market is already rebalancing," OPEC’s Secretary-General Mohammad Barkindo told reporters Sunday in Baghdad. “We have started seeing stock levels coming down.”

$60 oil not far away. Investment bank UBS said in a recent report that the oil market is heading towards balance even after taking into account rising U.S. output. UBS says demand will soak up the excess supply, and as a result of a tighter market, oil could be heading towards $60 within three months.

BNP Paribas also made a bullish call, expecting inventory drawdowns every quarter of this year. The bank says Brent could average $60 per barrel this year.

Pierre Andurand of Andurand Capital Management expects oil to hit $70 before the end of the year. "I think oil prices are likely to recover to around $70 … I think the market will switch to backwardation – sustainable backwardation – by late summer and that will bring the next wave in oil prices," he said on CNBC. His switch from bearishness to bullishness is notable, given his track record at successfully predicting some previous swings in the market.

Raymond James confirmed their price forecast of $75/Bbl for WTI by the 4th quarter. RJ predicts a big drop in global liquids inventories during the summer.

There has been a MAJOR SHIFT in the tone coming from Wall Street about oil just in the last two weeks. Lots of money will "rotate" into energy stocks this month. This is an annual game that has worked quite well for the Wall Street gang. Don't fight the herd. - Dan

Oil trade down 16 percent this year. The FT reports that the volume of oil moving on tankers at sea has declined by 16 percent so far this year compared to a year earlier, a sign that the OPEC cuts are having a tangible effect. The rise of U.S. shale output could be distracting from a tighter market in the rest of the world. “Water is where the market changes first,” Fabio Kuhn, CEO of Vortexa, an oil tracking company. “We think this is some of the first evidence that supply cuts are having a major effect.”

Oil inventories in Caribbean on the decline. U.S. crude inventories are at record levels, but that is not reflective of global conditions. Bloomberg reports that oil storage in the Caribbean has seen inventories decline by between 10 and 20 million barrels since mid-February. This can be interpreted as another sign of a tightening market.

Iraq increases compliance to 98 percent. Iraq said that it cut production to 4.46 million barrels per day in March, taking output down closer to its promised target. The reduction puts Iraq close to 98 percent compliant with the 4.351 mb/d it pledged to reach over the course of the six-month deal. The cuts made by Iraq – one of the biggest laggards on the OPEC deal – will boost confidence in the group’s cooperation. It could also build trust in the run up to negotiations over a six-month extension.