June 21st 2017
Macquarie Capital said that it has revised down its Brent and WTI crude target prices to reflect the growing U.S. shale output and lower cost of production.
“Our analyses indicate there will be too much oil being produced, loaded and marketed around the world until 2020,” Macquarie said.
The bank’s new targets for average Brent prices are $54.15/bbl in the second half of 2017, revised down from $58.75/bbl for the previous target.
The 2018 target for Brent was more substantial, by $6.43 to $49.33/bbl, and the 2019 target was down by $7.88 to $52.75/bbl.
The longer-term Brent price target was at $65/bbl versus $70/bbl in the previous guidance.
The downward adjustment in price targets for WTI matches Brent.
WTI crude price target for the second half of 2017 was down to $52.15/bbl from $56.75/bbl. This kept the $2/bbl premium for Brent over WTI unchanged.
The 2018 target for WTI was at $46.06/bbl, down from $52.50/bbl. The 2019 target dropped to $48.75/bbl from $56.63/bbl, and the long-term target fell by $5 to $60/bbl.
At presstime, WTI price was at $42.20/bbl, and Brent was at $44.53/bbl.
Macquarie expects WTI-Brent to trade toward the low end of a generally narrow, $2-to-$6-per barrel range. Although it estimates that merchant crude export economics require a $5/bbl WTI-Brent, actual exports have reached 1 million b/d at significantly narrower spreads.
“As long as U.S. refiners can consume greater volumes of light sweet domestic crude and export capability is not overrun by rising production, the WTI-Brent spread should stay in the low single-digit range, our base case forecast. In the case that U.S. production growth overwhelms infrastructure capacity, WTI could trade significantly below Brent and may even reach double-digit discount,” the bank said.
The bank’s long-term forecast reductions reflect productivity gains in tight oil, as well as greater shale resource prospectivity, and falling break-evens globally.
Macquarie expects oil prices to fare better in 2017 than 2018 and 2019, which would remain challenged by growing global supply.
“We expect draws of approximately 600,000 b/d in 2H17 (second half of 2017) but for surpluses to return to the 1.4 million b/d range in 2Q18 (second quarter 2018) and 3Q18 (the third quarter of 2018),” Macquarie said.
The 2018 surpluses would be even worse if WTI realizes at $50 or higher in 2H17, the bank said.
In that scenario, U.S. growth would continue and non-OPEC, non-U.S. production would bottom in 2018, it added.
The bank’s base case assumes OPEC returns to normal production in 2Q18. It believes the market is crushing oil prices now to prevent 2+ million b/d surpluses in 2018.
While supply looks bearish, “demand looks OK to good,” Macquarie said.
The bank models demand growth at 1.3 million/1.4 million/1.4 million b/d for 2017/2018/2019, respectively.
Its demand scenario analyses generally skew higher than its base case given the bank’s expectations for lower oil prices, modest refining margins and higher global vehicle miles traveled.
“In other words, demand is not the problem nor will it be for at least five years, except for recessionary periods,” the bank said.
Macquarie said that there are many sources of oversupply of oil.
The bank said that the economical, short-cycle shows U.S. exit rates of 1.5 million/0.3 million/0.2 million b/d in 2017/2018/2019.
The long lead time start-ups include Brazil, Kazakhstan, Angola and the N. Sea in 2019.
The bank also said that the accumulated global oil stocks of 500 million bbl will continue to bleed into the market, exacerbating weakness in grades, structure and price.
Even with rapid deceleration, 2018 U.S. production will average 1.2 million b/d above 2017, it said.
Macquarie expects the OPEC strategy to stay the course through 2019 or full stop on cuts.
“We believe OPEC has few options. Option 1 is to maintain cuts through 2019 and allow time for demand to grow and easy growth to slow; option 2 is stop the cuts immediately,” it said.
“The current strategy is probably the worst. The reality is even the most optimal of OPEC’s potential strategies probably will not work,” the bank said.