$70-$100 per Barrel for the Coming 5-10 Years
In its Oil Market Report sent to clients today, DNB Bank’s Oslo research team led by oil market analyst Torbjørn Kjus, said “we now believe prices have dropped to unsustainably low levels and our oil price forecast is now bullish vs the whole forward strip.”
In its analysis, DNB sees the 20%-30% CapEx spend cut that is ripping through the oil patch in 2015 continuing into 2016.
“We believe the CAPEX cuts will be even larger in 2015-16 than what we saw in 2008-09 and the effect on net decline rates could be quite meaningful.”
“The oil market is currently only focusing on bearish news and seems to ignore bullish data,” Kjus said in a research note emailed to clients with the report. “Lower prices are for example set to stimulate demand growth in the two largest consuming nations, China and the US. In fact we can already see it in the reported numbers.”
DNB cites Sanchez Energy’s (ticker: SN) well cost reduction to $5 million from $7.5 million, driven by oil service price reductions and increasing efficiencies. “That particular company is now guiding a CAPEX cut of 63% by the way, from $1.15 billion USD to $425 million USD. This CAPEX cut results in a drop in rigs from 7 to 3 and average production for 2015 is guided to be equal to the Q4-2014 production at 40-44 kbd. In other words, the company looks set to maintain output at approximately the current level even with the 63% cut in CAPEX. If this kind of behavior is representative for the broader shale industry, the oil supply-demand balance will fix itself during 2015 if shale production stops growing.”
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Analyst Commentary
We have been bearish to oil prices for 2.5 years, but we now believe prices have dropped to unsustainably low levels and our oil price forecast is now bullish vs the whole forward strip. We will not repeat all our arguments in this report for our view on future oil prices, but here just focus on the bullish arguments for why prices have dropped too low. All our bearish arguments which we presented during the autumn about over supply, building global oil stocks, weak demand, etc. are well documented. Our arguments for why the period of very high oil prices are over for at least the current decade is still valid, but the question is what are high oil prices and what are low oil prices?
We think the new mean reversion range will be around $70-$100 per barrel for the coming 5-10 years, which can be compared with the old $20-$40 per barrel range (real terms) we experienced from 1986 to early 2000’s. We wrote a large report last year which we named “Cheaper oil but not cheap”. We still stick with the view that we will not return to the cheap oil below 40 $/b, but at the same time 100 $/b + is way too high. After the dust settles, maybe in 2016, there will be more visibility on how much the costs to produce oil will have fallen after the large cuts in oil investments that we expect to materialise during the coming two years.
Torbjørn Kjus | Oil Market Analyst | Markets | Commodities
DNB Bank ASA
Oslo | Norway
Dir: +47 24 16 91 66
