raymond james comments22 Oct 2018 12:50
For the past two years, we have consistently maintained one of the most bullish oil price outlooks on the street. Despite recent bearish U.S. oil inventory builds, our already bullish 2019/2020 global oil supply/demand model has recently become even more bullish due largely to deteriorating supply outlooks for both Iranian and Venezuelan exports as well as further clarity on IMO 2020.
After raising our oil price forecast in April and again in July, we are now raising our oil price forecast again – maybe the third time will be the charm!
The bottom line is get ready for triple digit oil prices in the next few years.
It is important to note that this is not just a near-term issue for the next year or two: the picture beyond 2020 continues to suggest higher long-term oil prices after we refine our assumptions for global oil demand growth, U.S. base decline rates, OPEC production capacity, and non-U.S. supply.
Bottom line: We now believe that oil prices over the next two years must increase to levels that are high enough to materially slow down global demand growth.
There are three primary reasons that we are raising our oil price forecast for a third time this year:
First, Venezuelan oil production continues to deteriorate at a much faster rate than we had predicted at the beginning of the year.
Secondly, the sanctions that the U.S. has placed upon Iran are already having a much greater impact on Iranian exports/production that we thought just a few months ago.
Finally, it is increasingly clear that the consequences of IMO 2020 will effectively mean a 1 to 2 million bpd reduction in global oil supplies starting late 2019.
The consequences of these lower oil supply estimates are that oil prices must increase to levels that are sufficiently high to begin meaningfully slowing global demand growth over the next few years.
Accordingly, we are raising our 2019 forecast by $10/Bbl (or ~15%), to $77.50/Bbl WTI and $90/Bbl Brent.
For 2020, the cyclical peak year, our price deck rises even more sharply, to $92.50 WTI and $100 Brent (representing about a 25% increase from our prior estimates).
Beyond 2020, we are raising our price deck by $5, to $75 WTI and $80 Brent. Not only is our new price deck at the high end of consensus, but it is even more striking when compared to the longer-term backwardated futures curve. Specifically, these new out-year oil price estimates are now about 30% above current futures “strip” pricing.
While we do not think that triple-digit oil prices will become the new normal, at least temporarily that is what the market should require to squeeze demand out of the system.
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