Raymond James: Get Ready for $80 Oil

Raymond James: Get Ready for $80 Oil
Rebounding after a two-year collapse, it's only this month that oil prices have pushed up past $50 a barrel, but Raymond James & Associates says this is just the beginning for higher prices.

(Bloomberg) -- Rebounding after a two-year collapse, it's only this month that oil prices have pushed up past $50 a barrel, but Raymond James & Associates says this is just the beginning for higher prices.

In a note to clients, analysts led by J. Marshall Adkins say West Texas Intermediate will average $80 per barrel by the end of next year — that's higher than all but one of the 31 analysts surveyed by Bloomberg. 

"Over the past few months, we've gained even more confidence that tightening global oil supply/demand dynamics will support a much higher level of oil prices in 2017," the team says. "We continue to believe that 2017 WTI oil prices will average about $30/barrel higher than current futures strip prices would indicate."

The team went on to lay out three reasons for their bullish call, all of which are tied to global supply — the primary factor that precipitated crude's massive decline.

Here's how the rebalancing of the global oil market will be expedited from the supply side, according to the analysts:

First, the analysts see production outside the U.S. being curbed by more than they had previously anticipated, which constitutes 400,000 fewer barrels of oil per day being produced in 2017 relative to their January estimate. In particular, they cite organic declines in China, Columbia, Angola, and Mexico as prompting this downward revision.

"When oil drilling activity collapses, oil supply goes down too!," writes Raymond James. "Amazing, huh?"

Adkins and his fellow analysts also note that the unusually large slew of unplanned supply outages will, in some cases, persist throughout 2017, taking a further 300,000 barrels per day out of global supply.

Finally, U.S. shale producers won't be able to get their DUCs in a row to respond to higher prices by ramping up output, the team reasons, citing bottlenecks that include a limited available pool of labor and equipment.

Combine this supply curtailment with firmer than expected global demand tied to gasoline consumption, and Adkins has a recipe for $80 crude in relatively short order.

"These newer oil supply/demand estimates are meaningfully more bullish than at the beginning of the year," he writes. "Our previous price forecast was considerably more bullish than current Street consensus, and our new forecast is even more so."

The only analyst with a higher price forecast for 2017, among those surveyed by Bloomberg, is Incrementum AG Partner Ronald Stoeferle. He sees West Texas Intermediate at $82 per barrel next year. The consensus estimate is for this grade of crude to average $54 per barrel in 2017.

Over the long haul, however, Raymond James' team sees WTI prices moderating to about $70 per barrel.

To contact the authors of this story: Julie Verhage in New York at jverhage2@bloomberg.net Luke Kawa in New York at lkawa@bloomberg.net To contact the editors responsible for this story: Isobel Finkel at ifinkel1@bloomberg.net Joe Weisenthal at jweisenthal@bloomberg.net

Copyright 2017 Bloomberg News.


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Andrius | Jun. 24, 2016
What about all the barrels equivalent in inventory to offset any decrease in supply? I read a WSJ article that estimated ~700 million barrels are in storage and it will take a long time to burn through that before supply affects price.

Oliver | Jun. 24, 2016
Sorry, but too many here have no idea of producing hydrocarbons, of depletion of supply and demand. Depletion means that at a minimum, the 92,000,000 bbls a day produced will reduce to 85,000,000 bbls a day, which is not enough for existing demand let alone developing countries like India. So demand does not need to increase, as the production decreases each year, with for example shales depleting by up to 75% in the first year! Yes, some companies won't start to reintroduce capex until $75 oil, but that illustrates the problem and why oil prices will increase, because they have to introduce capex just to make up for the depletion, not increase it! The capex that will be required to increase production is in terms of trillions of dollars, and the Saudis can't, nor can many of the Middle Eastern fields that are actually in terminal decline, many having enhanced oil recovery schemes already in place, a sure sign of a very mature oil field. When pundits point to oil storage globally they seem to forget that for most countries there is a mandatory storage requirement anyway! Even if the move to highly subsidised electric vehicles rolls out, it will take 20 years and even more bankrupt governments to bring it about, and even then they will have recognised that their treasury requirements cannot be met as piling up massive subsidy, real subsidy to electric vehicles, and false accounting in the form of required zero emission credits, they will also suffer a massive shortfall from any hydrocarbon taxes, let alone the extra hydrocarbons that would be required in heavy industry to manufacture solar panels, inverters, batteries, and where lithium extraction creates highly toxic waste.

Jacqui | Jun. 24, 2016
Sorry, but the information here is misleading. There is no way that an increase of $30 per barrel is going happen within a one year period. The article mentions declines in production leading to this assumption ... what about Russia and the introduction of Iran since the ban has been lifted? There is still development and new production happening, Oman for example, which will lead to the continuation of the status quo. Realistically, I'd look for an increase of up to $10 per barrel. I'd be delighted if we got higher, but struggle to see it actually happening.

Edward | Jun. 24, 2016
Wishful thinking. Maybe low $60s by end of year and high $60s by this time next year. The biggest determining factor I think will be the US presidential election in November. It's going to be bad or really bad anyway you look at it.

Doc | Jun. 21, 2016
I see nothing in the market that will move prices up $30 per bbl in 18 months. The market boys always want to encourage higher prices so they can get rich off their options. We would count ourselves blessed to see WTI at anything over $55 by the end of 2017.

David | Jun. 21, 2016
The dynamics of the oil price seem to surprise everyone and it is highly plausible that we will see $70pb next year. Every price boom and bust indicates peaks and troughs higher than the next with the industry reacting in the same way each time; by cutting back investment and slashing overheads. It seems that the last boom may have been exaggerated however it also seems implausible that the introduction of Shale oil will significantly alter this reoccurring cycle dramatically. Bear in mind we were talking about $10pb back in February which seems outlandish now. Governments and corporations alike will not allow the industry to fail and there will likely be merges and buyouts of marginal Shale operators further increasing the probability of output agreements being reached. All this indicates a stable price of $75 - $80 within the next 3 years.

Greg | Jun. 21, 2016
Higher oil prices are coming, but $80 oil in 2017 seems extreme. I think prices will trend closer to $60/barrel in 2017 based on supply demand equation. Despite world economies limping along, you have millions of people moving from agrarian communities to urban communities in China and India. Just the simple migration of people to more oil based lifestyles should increase demand meaningfully. Combine this with OPEC and Russia producing at capacity with the exception of Iran, and even small increases in demand for oil can cause a significant increase in oil prices. And if turmoil in Middle East escalates taking supply off the market prices will increase further. I am bullish on oil, but not to the extent of Bloomberg.

Oliver | Jun. 21, 2016
That is complete tosh. it misses the most important aspect in hydrocarbon production....DEPLETION. To even produce what the world has produced this year requires in excess of 8% production to make up for the loss through depletion. With shales its even harder to make up the difference as they deplete at extraordinarily high rates. For years U.S. oil has been produced on the ridiculous models of spending $1.50 for every $1 produced and its even higher now with over 70 bankruptcies and more to come. Currently world uses about 92,000,000 barrels a day, and there is half the world wanting more, not having 24/7 power supply, not having the vehicles they want, but every bit as entitled to develop as everyone else. Even at 92,000,000bbls a day, which INCLUDES oil from every conceivable source now, including sour oil in the majority, heavy oils etc., all of which were not used in previous years, but are a necessity now. You even have tar sands the most ecologically damaging oil of the lot making up a lot of production. So even if you took an 8% depletion on 92,000,000, (it) works out a depletion of 7,360,000bbls A DAY SHORTFALL ON CURRENT DEMAND. That doesnt include the lost production from companies going bust, or the lack of investment going forwards which will make it even worse

Tony | Jun. 20, 2016
Oil will be at $60 by September 16th, 2016. Reason - gut feel and 40 years in the oil patch.

Chris | Jun. 20, 2016
I agree with the read and figures here. But, time will tell the tale!

Alan | Jun. 20, 2016
Sorry, it's not going to happen - there is nothing to increase demand or cause significant production cuts on the horizon that would allow for that kind of price increase. If anything, demand is going to decrease as a result of economic headwinds and geopolitical turmoil. At this stage of the game, in terms of oil company investment (at least a major oil company), oil will have to hit $70 to $75 a barrel and stay there steadily for 6 or 8 months before anyone will believe it and start the investment cash flow cycle. Everyone is hunkered down right now and they aren't going to take a risk. It may be 4 or 5 years before we see stable $80 a barrel oil again - if we even see it in the next decade.


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