WTI Outlook

EIA SHORT TERM OUTLOOK

https://www.eia.gov/outlooks/steo/pdf/steo_full.pdf[/BCOLOR]​

My interpretation of the below is:​

• EIA expect WTI to be around $61 in 2019, and $58 in 2020​
• Supply is clearly drying up - US experienced 10 million barrel decline in supplies for 3 weeks for the first time since 2007, and OECD inventories are below their 5 year average! Lets hope there is another 10 million draw tonight!​
• Demand appears to be increasing (and to this extent the IMF has increased its growth forecast for China https://www.cnbc.com/2019/04/10/imf...n-policy-support-trade-outlook.html)​

We have declining supply, and a case for increasing demand - I think this makes a strong case for further upside for oil. This is further evidenced by the increasing number of call options than put options​

"Brent crude oil spot prices averaged $66 per barrel (b) in March, up $2/b from February 2019. Brent prices for the first quarter of 2019 averaged $63/b, which is $4/b lower than the same period in 2018. Despite lower crude oil prices than last year, Brent prices in March were $9/b higher than in December 2018, marking the largest December-toMarch price increase since December 2011 to March 2012. EIA forecasts Brent spot prices will average $65/b in 2019 and $62/b in 2020, compared with an average of $71/b in 2018. EIA expects that West Texas Intermediate (WTI) crude oil prices will average $8/b lower than Brent prices in the first half of 2019 before the discount gradually falls to $4/b in late-2019 and through 2020."

"Economic indicators have recently sent mixed signals, increasing uncertainty regarding the future direction of oil prices. Recent manufacturing Purchasing Managers’ Indexes (PMIs) in several European countries are showing continued contraction in their manufacturing sectors. In the United States, the Treasury yield curve inverted in March for the first time since 2007, a phenomenon that indicates a combination of tight monetary policy, investment risk aversion, and lower long-term economic growth expectations. However, manufacturing PMI surveys in the United States and China increased in March, and the U.S. Federal Reserve indicated it is unlikely to increase interest rates for the remainder of 2019, all factors that could signify a reversal of some of the negative economic indicators and support economic growth, and consequently crude oil prices. "

"EIA estimates that global liquid fuels inventories declined by 0.7 million barrels per day (b/d) in March 2019 and by 0.5 million b/d for the first quarter of 2019, which would be the first quarterly stock draw since fourth-quarter 2017. High compliance among a number of OPEC and non-OPEC countries subject to voluntary oil production reductions has contributed to falling petroleum inventories in the Organization for Economic Cooperation and Development (OECD). Saudi Arabia, the largest oil producer in OPEC, produced 9.85 million b/d in March, down by almost 0.9 million b/d from October. OECD petroleum inventories are now lower than the five year (2014–18) average, which is considered a key metric among market participants for assessing global oil balances"

" U.S. petroleum inventories declined by more than 10 million barrels per week three times in the first quarter of 2019—including two consecutive weeks in March—the most weekly declines of more than 10 million barrels for the first quarter of any year since 2007."​

ARAMCO BOND PROSPECTUS

The following is from the Aramco bond prospectus.​

My take on this is:​

• Saudi's all in breakeven cost is around US$10
• The average breakeven cost in the US is around US$40
• Interestingly, the Saudi government ran a budget deficit of $18 billion, $22 billion, and $13 billion in 2016, 2017 and 2018 - so it is likely that they require oil prices higher than 2018 levels to balance the budget

Based on my review, I think Saudi will continue to ensure that the market is balanced (supply = demand), as they require 2018 pricing to balance their budget. I see demand being the major driver of the price of oil, specifically growth in China and India. Given market is expecting poor growth, I believe there is more chance of a surprise especially given the latest quantitative easing in China.​

Given the breakeven prices, I can't really see oil trading higher than $70 - $90, unless due to one off market shocks.​

Given that the rally in oil has coincided with the release of the Bond Prospectus, I do feel that the market is "pricing in" the news that has just been disseminated, with the supply shocks further adding to the noise. All that seems to be lacking is the "pricing in" of equities within the sector.​

"​

The hydrocarbon industry is the single largest contributor to the Kingdom’s economy. The oil sector accounted for 44.0% and 43.0% of the Kingdom’s real GDP in the years ended 31 December 2016 and 2017, respectively. Furthermore, the oil sector accounted for 64.2% and 63.0% of the Government’s total revenues in the years ended 31 December 2016 and 2017, respectively. The Government is expected to continue to rely on royalties, taxes and other income from the hydrocarbon industry for a significant portion of its revenue. Any change in crude oil, condensate, NGL, oil product, chemical and natural gas prices or other occurrences that negatively affect the Company’s results of operations could materially affect the macroeconomic indicators of the Kingdom, including GDP, balance of payments and foreign trade and the amount of cash available to the Government"

"In 2016, 2017 and 2018, the Government issued $18 billion, $22 billion and $13 billion, respectively, in the international capital and sukuk markets to fund its budget. A shortfall in funding to the Government or a decision to seek more revenue from hydrocarbons may lead the Government to change the fiscal regime to which hydrocarbon producers in the Kingdom, including the Company, are subject. Any such change could have a material adverse effect on the Company’s business, financial condition and results of operations and affect its ability to make planned investments or to make payments on the Notes."

"Based on a comparison of production cost data of the Five Major IOCs and other leading oil and gas companies, the Company is uniquely positioned as the lowest cost producer globally as at 31 December 2017. The Company’s average upstream lifting cost was SAR 10.6 ($2.8) per barrel of oil equivalent produced in 2018, following the Industry Consultant’s methodology. In addition, the Company’s upstream capital expenditures for the year ended 31 December 2018 averaged SAR 17.7 ($4.7) per barrel of oil equivalent produced also following the Industry Consultant’s methodology.
"​

The Bond Prospectus shows production of 13.6 million boepd for the year = 5bn for the year

From the below, operating costs (excluding royalties) to Aramco is US$143B- US$55B = US$88B / 5bn =
US$18/boe​

Payments to the Saudi government are
-US$41B other revenue is an equilisation payment Saudi make to Aramco)
+US$55B (royalties)
+US$381B (income tax)
= US$395B / 5bn = $80 /boe​

In addition, in 2018 Saudi ran a US$13B deficit = $3 / boe​

So it is pretty clear, Saudi require a oil at $83 to run a surplus!!​

WTI OUTLOOK

Interestingly, the long term average from the WTI chart is around US$75 (which equates to Brent at US$80 - which surprise surprise is the price Saudi require to balance their budget).​

Even the 1-year WTI chart seems to average at US$65.​

I think if we see WTI break US$65 support (which could happen tonight), it may well stay between that and $75 - which is now my base case.​

Long term WTI​

1-Year WTI
​