Barclays on shale oil & stubbornly high oil inventories. Neither is new news, but nor are they aint going away soon.

Just the numbers? OK ...

WTI forecasts (these in USD per barrel):

  • Q2 2017: 50
  • Q3 55
  • Q4 48
  • Q1 2018 48
  • Q2 56
  • Q3 58
  • Q4 55

BRENT:

  • Q2 2017 52
  • Q3 57
  • Q4 50
  • Q1 2018 51
  • Q2 58
  • Q3 60
  • Q4 58

Want MOAR? (The reasoning, OK ...)

Of all the reasons for the recent sell-off, we believe the most viable relate to the perception of shale's breakeven and stubbornly high inventories in the OECD.

  • A souring in long-term sentiment is driving prices lower.
  • We expect oil prices to move to the mid-$50s in the summer but then fall to a $50/bbl average in Q4 17 and Q1 18.
  • Many factors, including a weak gasoline demand reading, the return of African supplies, a disappointing OPEC meeting, Chinese economic concerns and stubbornly high inventories, have moved oil lower in the past two months. The most worrisome for market bulls, however, relates to the perception of shale's breakeven.

US tight oil producers proved in the last earnings season that they continue to grow production within cash flow in a $50/bbl world and can likely grow on an even more accelerated basis at $55-60/bbl.

  • If the OPEC/NOPEC policy is a signal of where the 24- country group is going to be producing, the marginal barrel produced of the other supply will ultimately determine price.
  • If there is universal acceptance that tight oil output is that marginal barrel, then cost improvements showcased in Q1 earnings suggest the market must reprice that barrel even lower, thus the recent correction.

For 2017, producers have already hedged 30-40% of their output on a weighted average basis.

  • In 2018, at the end of Q1 reporting season, the S-Mid cap group had hedged just 13% of their oil output, and the large cap group had hedged just 5%.
  • This low end 1Q hedge ratio is not abnormal. In 2016, the large cap group had also hedged about 5% of its output. But if a producer interprets OPEC's action (or lack thereof for 2018) as changing its fundamental outlook for 2018, that may have brought a new wave of selling activity, exhibited in the WTI futures curve shape.

(bolding mine)

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ps. I don't know about anyone else but I always pay more heed to the reasoning than the numbers (forecasts). The reasoning for analysts is not always comprehensive nor correct. Then again, neither is mine.