Released October 07, 2020 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--One oil-bullish speaker stood out, if not alone, among the largely bearish speakers at last week's virtual oil and gas conference about the Permian Basin and Eagle Ford Shale.
Marshall Adkins, managing director and head of investment banking at Raymond James Financial Incorporated (NYSE:RJF) (St. Petersburg, Florida), began his career as a petroleum engineer, which may have given him a different perspective in assessing the oil industry compared with peer analysts who went for an MBA before joining a securities firm.
Speaking September 29 at the DUG Permian Basin and Eagle Ford virtual conference, sponsored by Hart Energy (Houston, Texas), Adkins said oil price forecasting was "a dangerous sport because you're going to be wrong, it's just a question of degree." With that caveat, he predicted oil prices would double from current levels by the end of 2021, and $100-per-barrel West Texas Intermediate (WTI) in 2022 was a probability, not a possibility.
Adkins cited a number of factors that caused him to be bullish on oil prices when many of not most of his peers are bearish. Those factors included robust demand growth, sharp drawdowns in global oil inventories, natural production declines in unconventional reservoirs, and the resistance investors are expected to show producers who want to quickly increase their capital spending to capture higher oil prices.
"The market is severely underestimating the consequences of the current downturn, which is unprecedented," Adkins asserted. "The die is being cast for a substantial rebound next year. We will see meaningful price increases in late 2021 and beyond."
Regarding global demand destruction, Adkins claimed initial estimates turned out to be significantly overstated. Initial reports estimated global demand dropped nearly 30 million barrels per day (BBL/d) this past April as the COVID-19 pandemic choked off economic activity. But subsequent research has shown demand destruction estimates were "substantially less that consensus models," perhaps 10 million BBL/d less than the 30 million BBL/d estimate the world had coalesced around, he said.
He said global demand for oil, mainly in the transportation sector, was recovering faster than most people had expected. He conceded there likely was going to be some permanent reduction in demand, possibly 3 million BBL/d across the world, stemming from lifestyle changes. Still, he said, during times of uncertainty in the pandemic, people preferred to drive their cars rather than use public transport and risk possible infection from other riders.
"Yes, there will be more Zoom meetings and less business travel, but no one wants to get on a bus or train," he said. He dismissed highly optimistic mobility data from Apple as "silly bullish," but said data from energy consultants Rystad Energy (Oslo, Norway) was a more accurate reflection of transportation patterns. That data showed that the miles traveled in vehicles has nearly gotten back to what it was before the pandemic. "People have underestimated how quickly and strongly road travel has come back," he claimed.
The Raymond James banker said there is a lot of pent-up demand in the U.S. and global economy. "Everyone is trapped at home. But when we do open up the economy in full, you will see a big boost in consumption," he said. Adkins did not address currently rising levels of COVID-19 infections and deaths around the world, but he said he expected there would be a vaccine within six months, by early 2021.
On the supply side, he did say that OPEC+ nations have done a better-than-expected job of cutting production to rebalance global supply and demand. He also asserted oil inventories are being drawn down by the 37 member nations in the Organization for Economic Cooperation and Development (OECD) (Paris, France). Inventory drawdowns were about 2 million BBL/d between mid-May and the end of August, further reducing global crude oil supply. U.S. production is expected to decline about 2.5 million BBL/d in 2020, and the country is reducing oil imports as well.
"We are in an under-supplied global oil market, and this is a big point that most people haven't focused on," he told the Hart Energy conference. "It will be really hard to grow U.S. crude oil supply like we need to without a massive increase in spending."
Investors likely will oppose such a massive increase, given how poorly oil companies have performed when oil prices were much higher. So a massive increase in capital spending is unlikely until meaningfully higher prices are evident. Should higher levels of capital expenditures be approved, it will take some time for that spending to lead to increased production.
Put all those factors together--lower-than-expected demand destruction, rising demand for transportation fuels, oil inventory drawdowns, reduced production from OPEC+ nations and the U.S., and lower prices discouraging new production--and you have the ingredients for a resurgence in crude oil prices, he said.
He assumed WTI prices would end 2020 at around $50 per barrel, roughly 25% higher than they are currently. By the end of 2021, they will rise to about $70 per barrel as the market gradually starts to reflect supply and demand fundamentals. By the end of 2022, triple digit WTI prices are "a probability, not a possibility," he predicted.
"There will be consequences to the damages that are being inflicted today by lower (drilling) activity and lower production," he said. "It will take a long time to change the trend line we are on, but the balancing factor will be higher oil prices. Not a little higher but a lot higher."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
Marshall Adkins, managing director and head of investment banking at Raymond James Financial Incorporated (NYSE:RJF) (St. Petersburg, Florida), began his career as a petroleum engineer, which may have given him a different perspective in assessing the oil industry compared with peer analysts who went for an MBA before joining a securities firm.
Speaking September 29 at the DUG Permian Basin and Eagle Ford virtual conference, sponsored by Hart Energy (Houston, Texas), Adkins said oil price forecasting was "a dangerous sport because you're going to be wrong, it's just a question of degree." With that caveat, he predicted oil prices would double from current levels by the end of 2021, and $100-per-barrel West Texas Intermediate (WTI) in 2022 was a probability, not a possibility.
Adkins cited a number of factors that caused him to be bullish on oil prices when many of not most of his peers are bearish. Those factors included robust demand growth, sharp drawdowns in global oil inventories, natural production declines in unconventional reservoirs, and the resistance investors are expected to show producers who want to quickly increase their capital spending to capture higher oil prices.
"The market is severely underestimating the consequences of the current downturn, which is unprecedented," Adkins asserted. "The die is being cast for a substantial rebound next year. We will see meaningful price increases in late 2021 and beyond."
Regarding global demand destruction, Adkins claimed initial estimates turned out to be significantly overstated. Initial reports estimated global demand dropped nearly 30 million barrels per day (BBL/d) this past April as the COVID-19 pandemic choked off economic activity. But subsequent research has shown demand destruction estimates were "substantially less that consensus models," perhaps 10 million BBL/d less than the 30 million BBL/d estimate the world had coalesced around, he said.
He said global demand for oil, mainly in the transportation sector, was recovering faster than most people had expected. He conceded there likely was going to be some permanent reduction in demand, possibly 3 million BBL/d across the world, stemming from lifestyle changes. Still, he said, during times of uncertainty in the pandemic, people preferred to drive their cars rather than use public transport and risk possible infection from other riders.
"Yes, there will be more Zoom meetings and less business travel, but no one wants to get on a bus or train," he said. He dismissed highly optimistic mobility data from Apple as "silly bullish," but said data from energy consultants Rystad Energy (Oslo, Norway) was a more accurate reflection of transportation patterns. That data showed that the miles traveled in vehicles has nearly gotten back to what it was before the pandemic. "People have underestimated how quickly and strongly road travel has come back," he claimed.
The Raymond James banker said there is a lot of pent-up demand in the U.S. and global economy. "Everyone is trapped at home. But when we do open up the economy in full, you will see a big boost in consumption," he said. Adkins did not address currently rising levels of COVID-19 infections and deaths around the world, but he said he expected there would be a vaccine within six months, by early 2021.
On the supply side, he did say that OPEC+ nations have done a better-than-expected job of cutting production to rebalance global supply and demand. He also asserted oil inventories are being drawn down by the 37 member nations in the Organization for Economic Cooperation and Development (OECD) (Paris, France). Inventory drawdowns were about 2 million BBL/d between mid-May and the end of August, further reducing global crude oil supply. U.S. production is expected to decline about 2.5 million BBL/d in 2020, and the country is reducing oil imports as well.
"We are in an under-supplied global oil market, and this is a big point that most people haven't focused on," he told the Hart Energy conference. "It will be really hard to grow U.S. crude oil supply like we need to without a massive increase in spending."
Investors likely will oppose such a massive increase, given how poorly oil companies have performed when oil prices were much higher. So a massive increase in capital spending is unlikely until meaningfully higher prices are evident. Should higher levels of capital expenditures be approved, it will take some time for that spending to lead to increased production.
Put all those factors together--lower-than-expected demand destruction, rising demand for transportation fuels, oil inventory drawdowns, reduced production from OPEC+ nations and the U.S., and lower prices discouraging new production--and you have the ingredients for a resurgence in crude oil prices, he said.
He assumed WTI prices would end 2020 at around $50 per barrel, roughly 25% higher than they are currently. By the end of 2021, they will rise to about $70 per barrel as the market gradually starts to reflect supply and demand fundamentals. By the end of 2022, triple digit WTI prices are "a probability, not a possibility," he predicted.
"There will be consequences to the damages that are being inflicted today by lower (drilling) activity and lower production," he said. "It will take a long time to change the trend line we are on, but the balancing factor will be higher oil prices. Not a little higher but a lot higher."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
