Oil Prices and Production Cuts a Priority at Leadership Forum

Looking for a Rally, but When?

John Spears of Spears & Associates addressed the issue of how far prices might fall and when they could rebound. "U.S. oil prices dropped off a cliff in 2014," said Spears. “In June of 2014, oil was at $90/barrel, but 2014 saw global oil consumption weakening. At the same time, U.S. oil output grew faster than global oil production. We’ve never seen this happen before, and it was just not sustainable. We project that oil markets will begin to tighten in the second half of 2015 and prices should rally from approximately $50 per barrel at present to about $60 by the end of 2015, and then reach $70 by the end of 2016.”

Scott Graham of investment banking firm Jeffries, who gave a Wall Street perspective on the situation, also said the decline in oil prices should have been expected. “It had to happen. There were five years of increases, so when it started declining we should have known. Black Friday was not the day after Thanksgiving but the day OPEC said they were not going to cut production.”

“We need oil at $65 to $70 to get things going,” Graham said, “and we’re not expecting it to return to that level until the end of 2017. That means in our view oil and gas capital spending will decline an average of 20% this year, half of that next year. In 2017 it will remain flat in the first half and then we should see some increases later in the year.”

While Spears also saw prices rising gradually in the next couple of years, he warned that oil prices might become more volatile if U.S. shale oil production becomes part of the world’s “swing” production in the future. If that is case, then oil could often range from $50 to $150. This, of course, depends on the market for oil.

Demand

Spears said that global oil demand is forecast to grow 1.1% in 2015, up 1.0 million barrels per day (bbl/d) to an average of 93.1 million bbl/d, and 1.2% in 2016, to 94.2 million bbl/d. “These increased estimates for oil use are encouraging given the outlook for continued sluggish economic growth in Europe and Japan and economic slowdowns in other key markets such as China, Russia and Brazil,” he said.

“At the same time, OPEC’s surplus production capacity is expected to increase through 2016. Utilization of OPEC’s oil production capacity is projected to range from 92%-94% during this period.”

What does that mean for production levels in the U.S.?

The U.S. Energy Information Administration (EIA) currently expects U.S. lower-48 oil production to reach 7.4 million bbl/d in the second quarter of 2015 (up from 7.1 million bbl/d in Q4 2014), then decline to 7.2 million bbl/d in Q4 2015 and Q1 2016. After that point the EIA sees US oil production returning to an approximate 9% annual growth rate through the end of 2016 as it projects that an expected recovery in oil prices will drive a recovery in drilling activity.

Spears pointed out, though, that should demand rise, “We have a lot of spare capacity that could be brought on, so we could rapidly resume production if needed.”

Rig Count, Drilling and Spending

Spears pointed out that currently the U.S. rig count is down to 40-45% of the total from 2014. He believes rig activity will stabilize then increase 15% from end of 2015 to end of 2016. But, he said, “even when prices recover, operators are still dealing with an overleveraged situation. They spent too much money and now they have to repay, so they will suppress their capital spending even while oil prices recover.”

“In Canada, numbers are down about the same,” said Spears. “Canada probably won’t recover as fast as the U.S., largely because of some of the structural situations there. However, drilling activity in Canada is forecast to fall 35% in 2015.” According to Spears, the rig count is expected to fall through mid-2015 and then hold steady in the second half of 2015 as operator cash flow remains tight, but if the expected improvement in oil prices happens and the breakeven prices reduce to approximately $60/bbl in 2014 to $45-$50/bbl by the end of 2015, U.S. drilling activity is expected to increase about 15% from the end of 2015 to the end of 2016.

In January 2015, the Commerce Department announced that any “lightly processed” condensate would be considered a refined product and therefore eligible for exports. It remains to be seen what effect that will have on production and spending.

Kate Kunkel is senior editor for VALVE Magazine. Reach her at kkunkel@vma.org. Judy Tibbs is editor in chief of VALVE Magazine and VMA’s director of education. Reach her at jtibbs@vma.org.