American Oil and Gas Reporter - January 2017 - 38

Outlook 2017
BULLISH ON OIL
J. Marshall Adkins is director of energy research and a research analyst at Raymond James & Associates Inc. in Houston. He leads Raymond James' energy research team and focuses on oil field services and products. He joined the company
J. Marshall Adkins

in 1995 after serving 10 years in the oil field services industry as a project manag-

Director of Energy
Research and
Research Analyst

er, corporate financial analyst, sales manager, and engineer. Adkins holds a B.S. in

Raymond James
& Associates Inc.

petroleum engineering and an M.B.A. from the University of Texas at Austin.

Let us start with the biggest news in oil markets in some time:

Q: OPEC reaching consensus on a 1.2 million barrel-a-day pro-

duction cut in coordination with an additional 558,000 bbl/d cut
from key non-OPEC countries. For the record, Raymond James
was predicting higher prices even before the agreement was announced. How does OPEC's action impact the outlook for oil
prices in 2017 and the prospects for a general recovery? What
is a realistic trading range for WTI going forward?
ADKINS: The headline number on the production cuts is overstated, but I think we will see a legitimate 900,000-1.0 million
barrel a day cut between OPEC and non-OPEC countries. That
is a very big deal, and very bullish for oil markets.
There is a lot of room to run for crude prices, partly because
of OPEC's action, but also because of improving fundamentals
in general. Prices are not going to surge on a straight upward line,
but they are going to move higher. Most of the price gain will come
in the first half of 2017. On average in 2017, I think WTI prices
we be roughly $25 a barrel higher than they were in 2016.
There are always wild cards in crude oil, particularly when the
Middle East is involved. But assuming no major surprises, I think
we are going to see oil inventories fall through the first part of
the year in the United States, which should be the catalyst to higher oil prices.
Longer term, the improving fundamentals should underpin average WTI oil prices in a range of $60-$65 a barrel for the next
decade. The next few years should be higher than the longer term
oil pricing because of the damage inflicted on the U.S. service
industry during the past two years. The severity of the downturn
has badly diminished the capacity of the U.S. service infrastructure, and we have seen meaningful attrition in a lot of areas, particularly pressure pumping. As a result, bottlenecks will have to
be worked through, which will take time, before U.S. production
can be increased.
Put another way, oil does not need to be at $70/bbl or higher for a long time to stimulate substantial long-term U.S. oil pro38 THE AMERICAN OIL & GAS REPORTER

duction growth. I think producers can find all the oil the world
needs right here in the United States at a long-term price averaging closer to $60-$65/bbl. That does not mean the market won't
spend a couple years above that price range, just as we spent the
past few years well below it.
That may sound like stability, but it is actually a more traditional price-driven cyclical business than we have seen in most of our
lifetimes because it implies that OPEC is not in control. OPEC may
tweak supply here and there to manage oil prices, but there is a very
limited amount OPEC can do with its current capacity constraints.
That means the industry should see much shorter up- and down cycles driven purely by supply and demand centered on that $60$65/bbl midpoint price, at where we think it is economic to grow
U.S. oil supply more than 1.0 MMbbl/d annually.
OPEC's production agreement was met with disbelief by

Q: many market observers. Price expectations aside, what does

the agreement mean longer term to the global market? What are
the geopolitical implications? OPEC's track record on adhering
to production quotas is suspect, to say the least. Why should the
market expect member nations to behave differently this time?
ADKINS: It is a stop-gap measure, but if OPEC is able to cut
half the headline number for six months, it would bridge the gap
to the second half of the year, at which point our modeling shows
inventories drawn down meaningfully anyway. By the end of 2017,
I think OPEC will be producing every barrel of oil it can, so by definition, OPEC is relatively meaningless unless there is some kind
of demand shock that requires a supply reduction to "fix" prices.
Over the next decade, I see the United States supplying all of
the world's incremental demand growth plus growing enough to
compensate for production declines that are likely to happen outside the United States. Over time, these declines probably will include many OPEC-member nations also. In other words, if global oil demand grows 1.0 MMbbl/d and oil supply from outside the
United States falls 500,000 bbl/d, I think U.S. producers will have

American Oil and Gas Reporter - January 2017

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