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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: How Much Have Oil Fundamentals Really Deteriorated in the Past Few Months?
October 20, 2014

In last week's "Stat", we detailed what we thought triggered the recent oil price meltdown and attempted to shed light on the impossible topic of the short-term outlook for oil prices. This week, we will spend time addressing the much easier topic of longer-term oil supply/demand fundamentals. As you may recall, in the first half of 2012, we made a structurally bearish call on long-term crude prices on the premise that burgeoning U.S. oil production coupled with a lackluster global demand outlook would drive oil prices lower over time. While the logic and math behind our original call have proven sound, unexpected supply outages from Libya, Iran, and others have allowed WTI oil prices to cling mostly to prices above the $100 mark. So, does this recent downward oil price spike mean the market is finally grasping the severity of the longer-term structural imbalance? Not exactly. We suspect the recent weakness in crude prices is likely more trading related than fundamental related. That said, there are several fundamental oil drivers that have deteriorated over the past couple of months including: 1) increased production from Libya (and to a lesser degree Nigeria), 2) lower global oil demand growth assumptions, and 3) Saudi Arabia's apparent willingness to allow global oil prices below $90 per barrel. After rolling these recent changes into our oil model, the 2015/16 oil outlook is modestly worse than our prior iteration. That means our longer-term oil price outlook is modestly worse than before. Today, we are marking to market our 2014 price deck and lowering our oil price decks for 2015 and beyond; as shown below, this represents roughly a $10 per barrel (or roughly 9-12%) reduction in our WTI oil price assumptions.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

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