Oil oversold, upside risk to prices (with Jonathan Ferro, Lisa Brownwitz, Amory Horton)

The market is overestimating the pace of production recovery and underestimating future inventory rebuilding demand. Oil prices have priced in an overly optimistic supply return scenario. Brent could end the year at $80, WTI at $75. 2027 surplus estimates may be overstated due to strategic reserve rebuilding by India and China.

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CIBC 7.0
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Rebecca Babin 7.0

Oil oversold, upside risk to prices (with Jonathan Ferro, Lisa Brownwitz, Amory Horton)

wti

Year-end target: WTI $75. Risk/reward favors upside at current prices.

1 calls

-10

slightly worse than random

12/18/2025 2:40:20 PM	medium term down	20 days later	+1.94%	-1.94%

Rebecca Babin

The market is overestimating the pace of production recovery and underestimating future inventory rebuilding demand. Morgan Stanley's price cuts still have targets above the strip.

We are pricing in all supply coming back evenly and demand not recovering. That's overly optimistic on supply speed. Iranian crude and SPR release have added prompt supply.
Rebecca Babin

China rolling back product export bans will pull forward crude demand. We are overestimating downside just as we overestimated upside at the height of the conflict.
Rebecca Babin

Year-end target: Brent $80, WTI $75. The market is pricing 85% of flows resumed by end of July; that may get pushed out.

Risk/reward favors upside at current prices.
Rebecca Babin

2027 surplus estimates of ~4 million barrels/day are challenging. But India and China are likely to rebuild strategic reserves, absorbing some of that surplus. I don't see a dramatic 60s/50s crude scenario.

India wants to diversify away from Middle Eastern crude; China has stockpile rebuilding to do.
Rebecca Babin

OFAC waivers have made Iranian crude a free-floating market barrel, pressing prompt prices lower. But this is a 60-day waiver; if reimposed, the downside scenario doesn't play out.

Iranian crude previously traded at a huge discount due to sanctions; now it's competitive, pressing other barrels lower.

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