Oil forecasters go bullish

In early April, the Baker Hughes drilling rig count dropped by seven from the prior week. Importantly, the oil rig count was down by eight rigs. Last week’s decline followed double-digit drops the prior two weeks for both the overall rig count and those targeting crude oil.

With only 443 total rigs working last week, the domestic rig count has hit its lowest point since rig data was first published in 1944.

The falling count – especially given the magnitude of the recent weekly declines – was paired with a surprising weekly crude oil inventory draw. This caused oil prices to jump by more than 6% for domestic oil (West Texas Intermediate) and about the same amount for international oil (Brent). Depending on your choice, crude oil prices ended last week on one side or the other of $40 bbl. WTI spent the full week rebounding from Monday’s $36-bbl. level where it had eventually settled after the March price rally ran out of steam.

Coupled with the rig count and inventory data points, optimism has surfaced over a proposed April 17 meeting in Doha, Qatar. The meeting involves key oil exporting countries who have signaled a willingness to consider freezing production at January’s output volumes. If that occurs, oil prices will likely jump higher since the big three oil exporters – Saudi Arabia, Russia and Iran – all have boosted their output above January’s levels. An agreement would force them to choke back their output – a bullish signal for oil markets, even though the move wouldn’t immediately correct the global oil oversupply condition.

A recent presentation by PIRA Energy Group showed a global oil inventory correction already underway. Given the pace of the North American oil output decline and the lack of OPEC supply increases from presently offline supplies coming back into production, the market should reach balance before December 2017. Since markets tend to anticipate trends well before they become clear, PIRA’s forecasters expect oil prices to continue rising into the $40-$50-bbl. range by the fourth quarter. Their long-term forecast calls for per barrel oil prices in the $50-$60 range for 2017, $60-$80 in 2018, and $80-$100 by 2020.

While other optimistic forecasts have prices rising much faster than PIRA, everyone gets to the $80-$100-bbl. range by 2020. PIRA’s forecast hinges on a belief that global oil demand is growing faster than other forecasters are projecting. However, in response to a question, PIRA economists suggested world economic growth will be only marginally better this year than in 2015. They see global GDP rising by 3.1% versus 2.9% last year. PIRA puts long-term global GDP growth at 3.4%, but they are slowly losing confidence in that estimate.

Can we fully embrace a more optimistic outlook for a speedy oil industry recovery? Watch news about global economic growth for the answer.

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

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