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Investing Topics: Oil prices

Roger Conrad & Elliott Gue’s Oil Price Predictions for the rest of the year

Although we became bullish on oil prices last summer when the commodity slipped into the $40s per barrel, our forecast for West Texas Intermediate (WTI) to average between $60 and $65 per barrel appears conservative—especially in an environment where involuntary supply disruptions and robust demand growth could result in short-term spikes to $80 per barrel.

Updated Outlook for Oil Prices

Although we became bullish on oil prices last summer when the commodity slipped into the $40s per barrel, our forecast for West Texas Intermediate (WTI) to average between $60 and $65 per barrel appears conservative—especially in an environment where involuntary supply disruptions and robust demand growth could result in short-term spikes to $80 per barrel. We now expect WTI to spend most of its time between $60 and $70 per barrel in 2018 and Brent to range between $65 and $75 per barrel.

US Shale Operators: Showing Restraint, Or Encountering Constraints?

In the past, we’ve argued (correctly) that market participants and investors who bet against the resilience and potential upside in US oil production do so at their own peril. However, with the market now accustomed to these upside surprises, investors shouldn’t overlook the potential constraints on US production growth.

Déjà Vu for the Oil Market and Energy Stocks?

Last week’s spike in volatility was difficult for every investor, especially after a period of unprecedented placidity during which many market participants forgot the terror that these swoons can induce, even if US equities were overdue for some profit-taking.

For better or worse, the highs and lows of this down-cycle have accustomed energy-focused investors to bouts of sharp volatility. Nevertheless, the selloff in energy stocks was still harrowing, with the S&P 500 Energy Index giving up all the gains it had chalked up in the first month of the year.

Energy stocks appear to be suffering from a case of déjà vu. Last year, the sharp recovery in US crude production and the oil-directed rig count, coupled with money managers taking profits on their sizable long positions in Brent and West Texas Intermediate (WTI) futures, conspired to send WTI tumbling to as low as $42 per barrel.

On the surface, a similar dynamic is at play today.

 

Planning for a Pullback

An environment where oil prices remain lower for longer favors US independent exploration and production companies that own high-quality assets in the lowest-cost shale plays.

The best upstream operators continue to reduce their per barrel production costs through efficiency gains and enhanced drilling and completion techniques that boost per-well output. Some of the strongest names can generate a decent return on capital with oil prices in the mid-$30s per barrel.

Despite significant volatility, crude-oil prices have trended lower since the beginning of June. Our near-term outlook calls for West Texas Intermediate (WTI) to tumble into the $30s per barrel over the next one to three months, a period of seasonally weak demand.

This weakness could create another opportunity to buy our favorite exploration and production names.

 

Talking Tankers

The supply-demand balance for oil tankers will weaken over the next two years, with capacity additions outstripping demand growth related to emerging trade routes, global production trends and increasing oil consumption. Nevertheless, many tanker stocks trade at valuations last seen when the market faced much bigger challenges. Meanwhile, the outlook for refined-product tankers looks better, with a smaller order book and Saudi Arabia’s growing focus on exported value-added products instead of crude oil expected to keep the supply-demand balance relatively tight.

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    Elliott and Roger on Oct. 29, 2018

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    Experts

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor