Citigroup’s bearish oil strategist Ed Morse updated his oil price forecast Wednesday, bumping his Q4 Brent estimate from $66/b to $69/b. Meanwhile, Rystad wrote that a Russian oil embargo could send Brent prices to $240/b. With the Street calling for ever higher oil prices, it’s worth taking a look at Ed’s reasoning:
- Iran – Citi sees Iran adding 500kb/d by May and another 800kb/d by year end, reaching 2018 levels of production in early 2023.
- Shale – The note calls for higher shale production growth on the back of higher prices; Citi sees ~1mb/d of US production growth this year, and ~2mb/d of production growth from the US annually at $90 oil.
- Demand – lack of seasonality in 2021 / spring of 2022 was an aberration, and come Q4 demand will fall seasonally.
- Oil “intensity” – Citi notes that oil demand is driven by GDP growth; however, falling “intensity” of oil as a percent of GDP will soon hit EM demand growth.
The counterpoints are well understood. Iran hopes to present IAEA findings by June, suggesting May export growth is off the table. Furthermore, Russia is beginning to leverage its position on the UN Security Council to tie the Iran deal to further concessions from Washington. A long list of shale producers have said they won’t grow in 2022, including Pioneer (NYSE:PXD), Diamondback (NASDAQ:FANG), Devon (NYSE:DVN) and Marathon (NYSE:MRO). And the producers that are growing in 2022, namely Exxon (NYSE:XOM), show slowing growth in 2023+. The demand seasonality point is a fair one; however, “trend” demand growth from 2019 to 2022 would put global demand above 103mb/d, so suggesting demand will plateau at current levels of ~100mb/d appears aggressive. And finally, oil intensity of GDP is falling in the West due to policy measure. Policies that are unlikely to impact EM demand for some time.
Meanwhile, Goldman indicated Wednesday that Russian “self sanctioning” has created one of the largest disruptions to energy flows in history. Energy consultancy Rystad estimates that oil prices will rise to $240/b this summer, if Russian oil is fully embargoed. Forecasting near term prices in the face of supply disruptions is challenging (NYSEARCA:USO); however, Citi’s year end 2022 call for $69 Brent also feels challenging.