Reply To: Around The Barrel – Crude Oil and Gasoline Outlook as Global Recession Looms


RBC sees ‘the strongest fundamental oil market set up in decades, maybe ever’

n a note to clients on Wednesday led by global energy strategist Michael Tran, RBC called for the price of North American benchmark West Texas Intermediate (WTI) (CL=F)​​ crude to average US$114 per barrel next year. That’s up from the bank’s forecast of US$96.50 in mid-February.

WTI fell 2.01 per cent to US$109 at 3:24 p.m. ET on Wednesday.

“Recession or not, we believe that the oil complex remains in a structural, multi-year tightening cycle that will go as far as demand will take it,” Tran and his team wrote. “Absent a recession, the tightening cycle clearly points higher, potentially significantly higher. US$150/bbl, US$175/bbl, US$200/bbl? Pick a number.”

Tran says the supply-side of the oil price equation has been largely de-risked by recent events.

“The supply-side shock absorbers have been removed from the market,” he wrote, referring to factors such as low global inventories, and a lack of spare capacity from OPEC and North American producers. “This is important given that supply-side catalysts have torpedoed the majority of the oil market rallies of the past decade.”

However, Tran says a “deteriorating macro backdrop and the looming threat of a recession” have left the demand outlook potentially the most clouded since the Great Financial Crisis.

“Assuming all remains on track, we could certainly envision a scenario in which spot benchmark prices test $150/bbl or higher on a protracted basis over the next 18 months. The high conviction view is a function of structurally tight inventories, not hanging our hats on potentially flimsy demand,” he wrote.

“Given recessionary scenarios in which demand is taxed at a similar rate as previous downturns, we could see a scenario in which prices retreat into the mid US$70/bbl range in the back half of this year,” he added.

Tran says this is not part of the bank’s base-case scenario, and places a 15 per cent probability on such an event.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.