Raymond James Energy Stat of the Week
by J. Marshall Adkins
Energy Stat: Trump Torpedoes Near-Term Oil Price, Still on Track for $100 Brent in 2020
November 12, 2018
Near term oil prices torpedoed by Trump, but 2020 Brent prices still headed to $100/bbl
As we've covered in today's report, several bearish factors have converged in the past few weeks (since our oil upgrade) to drive a sharp downward correction in oil prices. Despite the oil price collapse, our global oil model has not changed and we still believe the long term fundamentals point to meaningfully higher oil prices over the next two years. So, what drove the oil collapse? First and foremost it was Trump backing away from his commitment to ''put the screws'' to Iran.
Additionally there have been several other bearish oil drivers including: 1) increasing U.S. oil inventories, 2) robust U.S. production growth for August, 3) the potential restart of the neutral zone, 4) increasing concerns about future global oil demand growth, and 5) the resulting technical breakdown and massive reversal in speculative position - all came to ''bear'' in relatively short order to drive more than a 20% correction from the recent oil price peak. But more importantly, what have these transitory factors changed in regard to our oil model. Our answer is not a whole lot, from a long term supply demand perspective.
Fine, oil prices are still on track to be meaningfully higher in 2020 - but, what catalysts get oil prices moving and when will they show up? To begin with, the speculative oil positions have now shifted into oversold territory. That means any positive data points over the next few months could easily drive a sharp upward recovery rebound. With the midterms now behind us and oil prices noticeably lower, we expect Saudi will proactively temper output (and we think a modest supply swing would have a big impact on inventories). Additionally, we think there is still potential upside relating to how much Iranian production comes off line. All in, the next few months could continue to be sloppy for oil prices but we expect enough bullish catalysts to emerge in early 2019 to reverse the meltdown of the past few weeks. More importantly, the oil market is still on track for Brent prices to move above $100/bbl in 2020.
This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.
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