“We may be the only oil price bulls left,” said Raymond James analyst Marshall Adkins in a note.
But rather than follow the crowd and reduce their $65 per barrel forecast for 2018 — a 45 percent upside to current oil prices — analysts dug in their heels and debunked the top 10 oil myths distracting investors from “what they believe is fundamentally a bullish overall picture for oil.”
Related link: Oil Is Now Trading At A New 2017 Low
Myth No. 1: Bearish Weekly Department Of Energy Inventories Data Have Helped Push Oil Prices Lower
While the beginning of 2017 did see unusually large inventory buildups, they were the result of a transportation lag between the Middle East producing and U.S. refineries receiving oil.
Adkins notes that OPEC was trying to ship as much oil as possible before implementing production cuts in January and that the most important data to watch is how U.S. inventories have moved since early March — a drop of about 300,000 barrels per day over four months.
Myth No. 2: Increased U.S. Shale Production Growth Will Mean $35 Per Barrel
While Adkins admits that several U.S. operators can make solid returns at $35 per barrel, that is only if costs besides drilling and completion are not included in calculations. On a full cycle basis, very few U.S. E&P companies could sustain positive returns even at $50 per barrel.
The result will be the industry as a whole outspending cash flow generation unless supply is cut back, requiring that most current supply forecasts be remodeled to account for increasing pressure. Greater-than-expected cutbacks in other countries also need to be taken into account.
Myth No. 3: Demand For Gasoline Is Weakening
Earlier this year, weekly DoE reports suggested gasoline demand in the U.S. is down 4 percent year over year.
“We do not believe that is true,” said Adkins. “Other data sources suggest that reported U.S. gasoline demand numbers are simply wrong!”
Adkins cites Department of Transportation reports that miles driven are up 1.6 percent year-over-year, while fuel efficiency across the board has “barely changed.” He also doubts PADD 3 demand could actually have been down 15 in March as reported.
Myth No. 4: Nigeria And Libya Will Flood The Market
While Nigeria and Libya — which are not bound by the OPEC production cuts — are producing more oil than what Adkins had modeled for six months ago, he considers it only an incremental negative.
The increases only make up a maximum 300,000 barrel per day increase, versus the 1.75 million barrel per day cut Adkins forecasted in late 2017. That is, if production is even sustainable — both countries are embroiled in unpredictable military conflicts.
Myth No. 5: OPEC Production Cuts Will Have Little Effect, Be Undone In Late 2018
This year, OPEC members’ overall compliance with the stated cuts is estimated to be 96 percent, significantly better than the 85 percent Adkins modeled. Regarding the temporary lifespan of the cuts, Adkins points out that “that’s the whole point.” The cuts were put in place to correct current supply levels, not create a new status quo.
Adkins also doubts OPEC can return to the huge levels of production seen in late 2016 given problems in Venezuela and a belief that Saudi Arabia was producing 500,000 barrels per day above a sustainable volume.
Myth No. 6: ‘Floating Storage’ Data Suggest Deteriorating Supply/Demand Equation
The latest Bloomberg “floating storage” data shows global levels having recently risen 195 million barrels per day. Adkins didn’t dispute the data, but did say it is “not exactly reliable” and still shows levels below March’s. The data also excluded a 50 million barrel drop in Iran floating storage since November.
On it’s face, the data suggest global inventories are “bursting at the seams.” This is “fake news,” as Adkins put it, and it is more likely that oil futures have shifted to open up more contango opportunities, which often use floating storage. Global capacity is still a long way away.
Myth No. 7: Crude Inventories Is The Only Weekly DoE Data Work Tracking
Adkins believes the market places too much weight on crude inventories, discounting gasoline and distillates. Since the surge of OPEC supply at the end of 2016, inventory trends for the two, in addition to crude as discussed above, have significantly improved.
Only tracking crude does not capture the full picture, which is bullish. In all, inventories have fallen contra-seasonally by about 500,000 barrels per day since February.
Myth No. 8: The U.S. Has A Huge Supply Overhang From Uncompleted Wells
Drilled-but-uncompleted wells make projecting difficult for most investors and even many energy specialists, but Adkins is confident his model has accounted for that uncertainty.
Adkins believes drawdowns on these wells, which are at an unusually high number, will only have a modest effect over the next few years. His approach suggests uncompleted well levels peaked over a year ago and have been declining.
Myth No. 9: Electric Vehicles Threaten Oil Demand In The Near Term
Adkins has no doubt electric vehicles will be a force to reckon with, just not in the near term. The cumulative effect of all electric vehicles sold in the past few years translates to only an 80,000 barrel per day reduction in demand.
Looking further, the cumulative impact through 2020 is estimated to be 270,000 barrels per day. Forecasting beyond that, Adkins says, would be “getting into the realm of total guesswork.” Sufficient to say though, electric vehicles will likely not pose a serious threat to oil demand before 2025.
Myth No. 10: The IEA 2018 Supply Growth Forecast Is Extremely Bearish
Similar to the floating storage numbers, Adkins has no doubt the IEA forecasts are solid. That said, interpretations of it are not. “We took numerous calls from investors panicked that “the IEA was forecasting that supply would exceed demand next year,” said Adkins.
What the forecast really said was that supply growth would exceed demand growth, referring to rates, not volumes. Supply growth is expected to exceed demand growth by only 0.1 million barrels per day. Adkins’ model suggests the market will be undersupplied by 1.3 million barrels per day, meaning that net-net the market will still be undersupplied by 1.2 million barrels per day.
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