Shale will be needed to fill in the gaps for future demand

Oil likely will not be able to sustain a price over $70 per barrel for some time, but that does not mean that the end is near for the shale industry, Wells Fargo Securities Senior Equity Research Analyst Roger Read told attendees of EnerCom’s The Oil & Gas Conference 21, Wednesday. Demand will start to pass supply and work down record-high inventories, and while it does, shale stands positioned to begin filling in the supply gap.

“So who are winners [in the global oil market]? Shale, shale and shale,” Read told the audience.

Wells Fargo expects oil prices to average in the mid-$40s this year, and continue higher. By the back-half of 2017, prices could be above $60, said Read, but the industry will likely have to wait several more years before they move to $70 and higher.

With so much excess oil in storage, Wells Fargo believes it will take until 2019 to work off the overhang in crude oil, prompting new exploration and higher prices.

“If you don’t need exploration to find new reserves, it becomes a question of what price do you need to develop the oil you know is there already,” said Read. Until the overhang is completely worked off, and additional production is needed to meet demand, oil prices will remain well below the $100 mark seen prior to the November 2014 price collapse.

Mega-projects will not be able to react quickly enough to support the immediate demand, however, leaving shale operators an opportunity to fill in the gaps. As prices begin to justify more mega-projects, Wells Fargo expects non-OPEC producers to add 8.6 MMBOPD through 2019 via large-scale operations.

Looking at OPEC’s year-over-year production increases, Read pointed out that the group appears to be producing less now than this time less year, based on numbers from Bloomberg. Given that the group is likely at, or very near, capacity, it is now much easier for its members to discuss freezing production at current levels, said Read. News that OPEC might try to broker another production freeze helped to bolster prices this week, but Read cautioned that there are still plenty of barrels offline in places like Libya and Nigeria that could return to the market in the future.

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