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Adkins: Rebalance of oil supply/demand to set US drilling industry on path to recovery

By Alex Endress, Editorial Coordinator

US drilling contractors struggling with the weak market can take some comfort in the likelihood that the rig count is within weeks of bottoming out, Marshall Adkins, Partner at Raymond James & Associates, said at the 2015 IADC Drilling Onshore Conference in Houston on 14 May. Heading into 2016, oil supply and demand will likely start to become more balanced, he said. “If you combine our supply numbers with demand, what you will see is we are oversupplied by about 800,000 barrels of oil per day this year… Next year, we’re going to be undersupplied. We’re drawing inventories down 300,000 (bbl) a day,” Mr Adkins said.

Meanwhile, although year-on-year growth in global oil demand is estimated to slow down, it will still likely increase by nearly 1 million bbl/day for the next few years, he said. “Where is that million going to come from? It has to come from the US land primarily… and that means (the industry) applies a higher rig count to accomplish that.”

Mr Adkins expects the total US rig count to level at the low 900 range for the remainder of 2015 but to start steadily climbing over the next three to four years back up to the 1,700-1,800 range. By 2019, he believes the market will see another oversupply situation leading to another fall in rig counts. “But I think we have a very good three, four years ahead of us,” he remarked.

In terms of prices, he forecast oil will stay around $60/bbl this year, which will help to sustain the supply/demand correction. “From my perspective, the right price to balance the oil market for 2016 is $60 average this year,” he said. Over the next few years, prices will likely rise to $70-75. “That drives cash flows higher for the industry sufficiently to drive our activity meaningfully from where we are today,” he said.

Despite his optimism for a solid recovery, Mr Adkins also cited several “wild cards” that could put this recovery at risk. One is the Middle East and North Africa. Part of what made the $100/bbl oil boom possible in the first place was supply taken offline from Sudan, Nigeria, Syria, Iraq, Iran and Libya, he said. But over the past couple of years, some of that production started coming back online. While these countries have been impacted by the downturn, the extent of their growth in the coming years could contribute an oversupply of oil and lead to lower prices.

Another wild card is the US dollar, which Mr Adkins said was the trigger for the initial sell-off that started in mid-2014 as the dollar was rising. The strength of the dollar has historically had an inverted relationship with the price of oil, he said, adding that a strong dollar reduces demand from emerging market countries. “The dollar has rallied dramatically over the past nine months. If it continues to go higher, you risk some of these countries failing, which could drive oil meaningfully lower,” he said.

One factor that is more controllable than both the Middle East and the value of the dollar is the US ban on crude exports. Although the US still imports millions of barrels of oil per day, this is because the refinery system in the US “cannot handle the type of crude we’re producing,” Mr Adkins said. “So if you don’t allow exports of crude, which can be refined more efficiently by other refiners outside of the US, then you run the real potential of the WTI spread blowing out dramatically.”

Fortunately, efforts are ongoing in Washington, DC, to allow crude exports. Liz Craddock, IADC VP of Policy, Government and Regulator Affairs, referenced ongoing work around a new piece of legislation known as the Condensate Act of 2015. It is supported by a group of senators led by Sen. Lisa Murkowski from Alaska. “We are hoping to work with this organization to make sure that it does the exact things that we need it to do to drive the market in the right direction,” Ms Craddock said. “It’s off to a good start.”

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