Underlying figures and additional commentary inside. Takeaways are neutral. AG-OPEC exports to both the US and Asia ticked up, but only slightly. Total AG-OPEC exports MTD and Other Swing supply were both unchanged vs the prior week and our inventory forecast isn’t materially different from consensus.
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Underlying figures and additional commentary inside. Takeaways are positive. AG-OPEC exports continue to trend downward across the board, as does Other Swing supply. Our inventory draw forecast is also bullish relative to the consensus build.
This week’s release of 1) the monthly IEA report, 2) OPEC’s monthly report, 3) the EIA drilling productivity report, and 4) BP’s statistical review brings occasion to update our global oil supply/demand framework. With refreshed inputs, we continue to believe that crude oil has higher probability of S/D balance in 2021 than refined products, favoring the upstream outlook vs crack spreads. We maintain our Overweight rating on IOCs and Market Weight weighting on Refiners. We note that while we are cautious on the outlook for crack spreads next year, our view on the sector is neutral due to solid exposure to the US economy re-opening and a favorable near term outlook for cracks as US production curtailments reverse.
Underlying figures and additional commentary inside. Takeaways are positive as our forecasted inventory draw is bullish relative to the consensus build, exports trending down in each region we track and total AG-OPEC exports falling thus far as we move through June.
Yesterday (6/15/20) BP announced an adjustment of its long-term oil price deck from $70 Brent to $55, and a resultant post-tax write down expected for 2Q20 in the $13B-$18B range (about 10% of YE19 PP&E + intangibles). We thought this announcement was self-explanatory but have since observed several media reports quoting analysts that the write down and price deck adjustment portend a dividend cut. We do not agree with this assessment. While we note that we viewed RDS’s dividend cut as likely a longer term positive affording rapid deleveraging, and that our recent BP upgrade (industry note link HERE) was due more to its cash ROIC profile rather than dividend yield, we do not think the write down has anything to do with the dividend policy.
Underlying figures and additional commentary inside. Takeaways are neutral. Our inventory build is bearish relative to consensus’ draw, though AG-OPEC US-bound and Asia-bound volumes, as well as Other Swing supply, are each trending down.
Wolfe Research E&P analyst Josh Silverstein asserts E&Ps are pricing in $45-$50 WTI, and probably closer to $50 after the 12% rally in the XOP on Friday. Energy aside, the rest of the stock market is also pricing in a return to normalcy, even excluding businesses that are benefitting outright from the current environment. We believe that $50 Brent is achievable (although not a base case) by 2021 even in a scenario where global oil demand is lower than 2019 levels, based on our supply/demand model that suggests a rising call on OPEC next year. Even if that’s wrong, however, IOCs should at least price in the same commodity outlook as smaller producers, but we believe based on historical valuations a $50 oil price in 2021 implies material upside in the group, even with capex rising again.
We are upgrading BP to Outperform from Peer Perform given our belief that the company has a credible pathway to deleveraging and dividend coverage in 2021, with a resultant accelerating cash ROIC profile. Our new price target is $31. This note contains a table of updated 2020 and 2021 estimates along with our Investment Conclusion and valuation commentary on Page 2.
We believe the crude oil market is in the middle innings of a rebalancing process and IOC positioning could begin to skew more offensive. US L48 production curtailment restarts and a wave of US import landings from the April OPEC surge could represent that last wave of very negative oil market data, after which a more favorable 2021 supply/demand balance could come into focus. We expect this bad data flow to last approximately 4-6 weeks, with potentially elevated volatility but a more constructive base on the other side. Risks remain, and broadly we expect 2021 oil demand to be lower than 2019, but the “call on OPEC” to be higher.
Underlying figures and additional commentary inside. Takeaways are positive. Despite an above consensus inventory build forecast, we view the lower US-bound AG-OPEC exports, declining other swing supply (mainly Russia) and depressed Asia-bound AG-OPEC exports favorably.
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