Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )

OPEC production expected to stabilize

A recent analyst note from KLR Group indicated that oil and gas markets could balance in 2017 as OPEC production begins to stabilize and U.S. production rolls off. Saudi Arabia’s oil production is expected to stay at about 10.4 MMBOPD, while Iran gradually ramps up production and Iraq’s output moderates.

The crash in oil prices followed OPEC’s decision to continue pumping in order to defend market share, a move in late 2014 that sent the market into a tailspin. KLR expects that Iran will increase production to 3.5 MMBOPD by early 2017, while Iraq’s production will stabilize at 4.4 MMBOPD in 2016-2017. This, in combination with level production from Saudi, should allow markets to rebalance.

With OPEC producing to defend market share, the group will have 1.7 MMBOPD of spare capacity, made up entirely by Saudi Arabia, Iran and Libya. Saudi’s spare capacity will be approximately 0.6 MMBOPD once production stabilizes at 10.4 MMBOPD, while Libya and Iran will have 0.6 MMBOPD and 0.5 MMBOPD of spare capacity, respectively.

KLR OPEC Production and Spare Capacity

U.S. production expected to trough in Q3’17

Adding to the market stability will be a decline in production from the U.S., according to the research note. Supply from the U.S. peaked in Q2’15 at 12.8 MMBOPD, but the rapid decline in the rig count will push liquids production down through 2016-2017.

U.S. production is expected to decline by 0.7 MMBOPD this year, and 0.5 MMBOPD in 2017, before resuming growth. In KLR’s midcycle (2018 onward) estimates, the group anticipates that U.S. production will begin to grow again at a rate of about 0.5-0.7MMBOPD.

The downcycle drove a productivity increase of approximately 20% as operators moved to produce only their most economical assets. This improved productivity will likely start to fall after 2017 as production begins to climb again.

On the demand side, U.S. demand is up about 1.4% from last year on a four-week moving average. Demand growth should continue at a rate of about 0.5% this year to 19.5 MMBOPD driven by low fuel prices, but is likely to moderate once commodity prices begin to rise again.

KLR US Liquids Demand Growth

Oil could go above $80 as production moderates

KLR downgraded its expectations for crude oil prices moving forward, but the group still believes that oil could go above $80 from 2018 forward as markets adjust to supply. The group lowered its 2016 Brent/WTI price estimates by $22.25/$18.75 to $47.25/$46.25. It also lowered its 2017 price deck by $20/$17.50 to $70/$67.75.

Despite the substantially lowered price deck, KLR expects Brent and WTI crudes to reach $86 and $82.50, respectively, by 2018. The “negative supply implication of less global oil resource capitalization is the principal catalyst” for its price target, KLR said in its note.

Demand growth expected to come out of non-OECD countries

The main driver of demand growth continues to be developing economies. Non-OECD countries should see GDP growth of about 4.75% and oil demand growth of 2% per annum through the end of the decade. Developing economies inside the Former Soviet Union are less likely to see the same level of growth, however, as economic recession is exacerbated by weaker oil prices.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.