Morgan Stanley with a note I very much agree with:
Inventory draws and demand recovery have supported oil prices in recent months, but two factors are starting to take some wind out of the sails of this bullish thesis: Iranian exports and US drilling activity.We moderate our price forecast for 3Q and close our long Dec’21 Brent idea.
Inventory draws and demand recovery unpinned prices: The sum of on shore storage, floating storage and oil-in-transit has steadily declined so far this year, signalling a market in deficit. At the same time, mobility indicators have started to turn around, with the promise of a further, strong demand recovery ahead. Together, these factors have supported the oil price rally in recent months. Much of this thesis is still intact, but two factors have appeared that take the steam out of this bullish view:
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The return of Iranian exports may happen faster than we anticipated: So far, we have had conservative assumptions about the recovery of Iranian exports, expecting only a modest increase by 4Q 21. However, tanker tracking data suggests exports have already picked up more than we assumed. With renewed negotiations between the partners to the JCPO A current going on in Vienna, there is the possibility that this gains momentum. Much remains uncertain but we are raising our estimates for Iranian production, which moderates the inventory draws we see over the balance of the year.
On top, US drilling activity has continued to increase: The pickup in activity in the Bakken and EagleFord remains modest, but the rig count recovery in the Permian is following a trajectory nearly identical to 2016. Also,new well start ups in the Permian were already back to 2018/19 levels in Feb/Mar. Given the time lags involved, we still do not expect much US shale growth 2021, and without the contribution from basins outside the Permian, production growth will remain only a fraction of the 2017-19 levels. Still, US shale can start to grow several hundred thousand barrels per day again in 2022, enough to start gaining market share.
Hence, we moderate our 3Q Brent forecast: These factors set up an outlook in which OPEC may need to accommodate higher Iranian production in coming quarters, and rising US shale output in 2022. We still see inventory draws during the rest of 2021, supporting prices, but less than before. This moderates our expectations for how backwardated the forward curve can become and lowers our spot price forecast. Whilst we previously thought Brent could average $70/bbl in 3Q and overshoot temporarily, we now expect a range of $65-70/bbl.