By Kelli Ainsworth, Editorial Coordinator
After almost two years of falling oil prices and rig counts, the industry should soon begin to see the light at the end of the tunnel. Raymond James and Associates is forecasting oil prices to average $60 in Q3 this year and $75 in 2017. “I think we are right at the beginning of a multi-year cyclical upswing in our business,” Marshall Adkins, Managing Director at Raymond James, said on 19 May at the 2016 IADC Drilling Onshore Conference in Houston. And if oil prices reach those levels, the US land rig count could potentially average 1,000 by 2017 before climbing to an average of 1,300 in 2018, Mr Adkins said.
The growth in oil demand has been greatly underestimated, particularly when it comes to China, he asserted. “Everyone talks about the Chinese economy being terrible, but China posted the fastest oil demand growth they’ve seen in five years last year,” he said. As the Chinese middle class grows, so does the country’s gasoline demand as more people are buying cars. In 2010, approximately 17 million new automobiles were purchased in China. Now, the country is up to 25 million new car purchases annually. As a result, while gasoline accounted for only 19% of China’s oil demand in 2010, it accounted for 26% in 2015.
In the US, oil demand has also grown due to lower oil prices and, therefore, lower gasoline prices. “Over the past decade, gasoline demand growth in the US averaged zero. We didn’t grow at all, on average, over 10 years,” Mr Adkins said. “Last year, it was up 3% – the highest growth rate seen in over two decades.”
While demand is increasing, production has been falling. Raymond James anticipates the US oil production decline by 1.2 million bbl/day in 2016. This means inventory draws are expected this year, with inventories going down by an estimated 500,000 bbl in the latter half of 2016, and then another 1.3 million bbl through 2017.
As a result of these supply and demand factors, Raymond James anticipates an average crude price of $75 for 2017. At this price deck, Mr Adkins said, the firm would expect to see the US onshore rig count rise from an average of 500 in 2016 to more than 1,000 in 2017 and 1,300 in 2018. However, getting to these numbers will be a challenge logistically. While the expected increase in oil price and demand would justify putting those hundreds of rigs back to work, the industry will have to deal with the significant numbers of stacked rigs, as well as the accompanying workforce reduction, that has taken place over the past couple of years. That means it will be unlikely for the industry to staff up and reactivate rigs quickly enough to reach those numbers, he said.
If the oil price begins to rally in the latter half of 2016, as Raymond James expects, then it’s unlikely that E&P companies will be able to respond quickly and put significant numbers of rigs back to work before the end of the year. This means E&P companies will likely underspend their cash flows in 2016, leading the oil supply to grow at a slower rate than would be anticipated at a $75 oil price. “The undersupply gets even bigger and the prices go even higher,” Mr Adkins said.
Over the long term, Raymond James sees US onshore production playing a pivotal role in the world oil market. There are between 130,000 and 150,000 core locations and 500,000 non-core locations that have yet to be drilled in the five major US shale plays. When the productivity per rig – which has grown between ten- and twentyfold since 2007, depending on the play – is taken into account, US production has the potential to climb above 20 million bbl/day over the next decade, Mr Adkins said, especially as production declines elsewhere. “I think the US, within a decade or two, will be double the production of the two largest oil producers in the world today, being Saudi Arabia and Russia.”