Adkins: Bearish outlook in near term, $75 oil in 2015

By Joanne Liou, Associate Editor

The global industry outlook is bearish in the near term. Oil supply is growing twice as fast as demand, and the simple solution to this oversupply is to lower prices, Marshall Adkins, Managing Director at Raymond James & Associates, stated. The analyst foresees oil prices dropping to $75/bbl in 2015. Providing his analysis of the market outlook at the 2014 IADC Annual General Meeting in New Orleans on 14 November, Mr Adkins revisited a forecast he provided less than three years ago that could be applied again to today’s outlook. The global oil demand growth rate “is relatively benign. I think OPEC is going to need to cut (production) relatively soon,” he said. “Ultimately, the solution is lower prices, which we’ve seen in the last month. The way you get there is to slow the rig count.”

The good news is that this downturn looks different than the 1980s downturn, Mr Adkins said. “We had 16 million (bbl/day) of excess capacity back in the early ‘80s. It took us 20 years to work that off. We don’t have that today. You have a million (bbl/day) in excess capacity. Once you slow this US growth rate a little bit, then we’re back in business again.” Mr Adkins believes the industry will experience a short-term, two-year downturn, not five to 10 years.

Cash flow is a major driver of US oil and gas activity, he said, and it grew by 30% in 2013 and by 22% in 2014. “Activity is driven by cash flows. Everyone asks what’s the breakeven cost for this and that. Forget that. If cash flows are lower, spending is going down,” Mr Adkins stated. Raymond James is forecasting a 17% reduction in cash flows for 2015 and a 6% reduction in 2016. “Lower oil prices mean less E&P cash flows. Less E&P cash flows means less drilling,” which equates to lower production growth, he explained. “To get a 20-30% reduction in spending and/or activity, you need prices to be $65 to $70. We’re forecasting at $75 for 2015,” he added, and possibly lower in 2016.

For natural gas, Raymond James is modeling approximately 3 Bcf/day of supply growth by year-end 2014. “Due to the weather, we will modestly over supply,” Mr Adkins said. “The bigger issue is in 2015,” for which the analyst expects a supply growth of 3.5 Bcf/day. “Gas prices will come down meaningfully next year – below $3.50, if the weather is normal.”

Despite having to deliver a disappointing forecast, Mr Adkins reminded the audience that today’s outlook is similar to where the industry was less than three years ago – and the industry bounced back quickly. Despite the bearish outlook then, “in the subsequent two years after presenting that, oil was at $100. We had about 2 million bbl per day of outages that I didn’t have in my model.”