$120 by 2018? | Russell T. Rudy Energy LLC
In a recent article posted on “Real Money”, Daniel Dicker makes the case for $120 oil by 2018, and double digits by the end of next year. While this is by no means a consensus view, the author makes an interesting case based on generally accepted supply and demand forecasts, and enhances this with his take on company leverage, financing and the impact derivatives (futures contracts) have on oil prices.
As for future demand, Dicker uses a forecast that is currently being used by a number of analysts. However, his prediction as to supply differs from the mainstream. Nevertheless, he makes an interesting argument for significant, and fairly rapid, price recovery.
Most industry observers and analysts, including the U. S. Energy Information Administration (EIA) and the International Energy Agency, anticipate that demand will grow at a steady pace through the end of this decade. Dicker takes this widely accepted assumption and plots it over time based on when he thinks specific thresholds will be achieved.
Dicker notes that even before the oil price crash, production was increasing faster than demand, leading to the glut and subsequent low prices. As a result of these low prices, production growth is already starting to diminish. He contends that if nothing else were to happen, we would still see production eventually outstrip demand.
The author then factors in the effect of dramatic cuts in capital budgets. He thinks that this will result in sharp production declines within this year. He feels that most analysts are wrong when they contend that any short term price increases will quickly be negated by increased output by shale operators. He contends that this ignores the fact that these capital cutbacks are resulting in project deferrals and cancellations worldwide. Lack of activity in the Gulf of Mexico, problems in Brazil and a virtual curtailment of spending in Russia will all have a significant impact on global production after this year. He notes that most analysts, including the EIA, agree that capital reductions will impact future output and that his analysis differs only as to how soon it will happen.
Dicker feels that in spite of increasing efficiency and a backlog of drilled but uncompleted wells, there is no way that shale operators will be able to replicate the production increases that we saw from 2012-2014, no matter what the price of oil. He sees lack of financing and premium acreage as critical constraints.
As for longer lead time conventional and unconventional projects, Dicker sees the lack of investment over the last two years as leaving the industry exposed to significant production shortfalls. He considers this far more significant than any short term responses by shale operators to price spikes. He cites Chevron’s estimate in 2013 that just to offset demand growth and depletion, the industry would have to invest at least $7-10 trillion dollars by 2013 and he does not anticipate this happening. Dicker also points out that this analysis completely ignores the cessation of exploration this year which will likely continue for the next two years.
Consequently, Dicker sees production beginning to decline in 2016, and continuing to do so until mid-2018. At this point he anticipates renewed investment in energy projects in response to price increases as demand exceeds supply. He does not see this as an orderly process and predicts violent price swings. This will result in a massive influx of speculative capital to exploit price fluctuations, which will only drive prices higher and more quickly.
To read the article in its entirety, please go to http://realmoney.thestreet.com/articles/03/31/2016/case-120-oil-2018 .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
