Reliant Wealth Planning | Louisville, KY

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

Energy Stat: Permian Oil Diffs to Ease in 2019 As New Pipes, Debottlenecking Efforts Emerge
September 24, 2018

The best-known bottleneck in U.S. energy markets today is infrastructure constraints in the Permian Basin, most notably the shortfall of crude oil takeaway capacity out of the region to demand markets. The corresponding ''blow out'' in regional oil price differentials (in the Permian's Midland hub versus Cushing, Gulf Coast, and global benchmarks) materialized back in early 2018, but the situation is still unfolding. This is leading to a massive buildout of midstream infrastructure. When we held our two-day Aspen ''summit'' last month, the next stages of this issue were among the liveliest debates had by our collection of industry insiders! So, will the bottleneck of oil takeaway actually be resolved sooner than the market currently expects?

In today's Stat, we 1) review the changes to our pipeline takeaway capacity estimates and timeline schedules; 2) recalibrate our production outlook for 2018-2020+; 3) detail what this means for our Permian forecasts, 4) introduce the nuanced macro implications; and 5) highlight our views on the winners and losers based on our updated outlook. In short, we have increasing conviction that capitalism and energy industry ingenuity will help us avoid a worst case scenario differential of ~$40/bbl and even potentially resolve this issue sooner than we previously expected. Overall, while we still expect another ~12 month window with takeaway constraints, based on the more moderate shortfall compared to our prior model, we now expect the Midland-Brent diff to average ~$15/bbl in 2019 (from $25 before). In conjunction, we are also reducing our Brent-WTI spread forecast to $12.50/Bbl in 2019 (from $15/Bbl), leading to our WTI price forecast to be revised up to $67.50/Bbl in 2019.

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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