US industry experts debate the future of crude oil prices

Focus article by Christie Moffat

HOUSTON (ICIS)–Oil and gas executives are offering conflicting opinions about the future of crude oil prices.

The topic took center stage Wednesday during a panel discussion at law firm Mayer Brown’s “The Paradox of Abundance” global conference in Houston. Moderated by Lynn Cook, deputy Texas bureau chief at the Wall Street Journal, panelists debated whether West Texas Intermediate and Brent would rise to former highs.

John Gerdes, managing director and head of research at KLR Group, was optimistic about the future of oil prices, predicting a return to an $80/bbl environment in 2016, with prices potentially reaching $100 for Brent and $90 for WTI in 2017.

“The break-even cost of supply of the typical oil dollar model – no return – is $65 oil, looking at operational execution this year in an inflated environment. You will apply a 5% discount rate for that cost of supply, and you are at $80-$85,” Gerdes said.

“When we re-engage activity, the deflation forces of this industry that we are experiencing this year will largely prove transitory, and we will see a re-engagement of service engagement as we move out into [2016] full.”

Pearce Hammond, managing director and co-head of exploration and production research at Simmons & Company International, was more cautious in his assessment of future prices.

Hammond predicted that WTI would reach $65/bbl in 2016, and up to $67/bbl in 2017, with Brent trading higher and showing further improvement in the future.

Contributing factors included a reduction in the number of oil rigs globally, as well as a “looming integration” of oil barrels into the market and oil producers talking about returning to work at lower prices.

James West, senior managing director of research at Evercore Group, described his company’s position as “decidedly bullish” on oil prices, despite recent numbers.

West said his company believes that US production is “about to roll over, we think significantly”, and that capital expenditures (CAPEX) would come down by about 20%.

“We think we will see $75-$80 on Brent by the end of this year. We are getting relatively close to that now,” West said, adding that oil prices are largely cyclical, and that the current levels are likely transitory.

West also said that US investors are not focused on the international markets, which account for 90% of the world’s oil and have seen a decline in the production of oil from Russia and Africa.

All three panelists were not optimistic about the White House lifting the current ban on the export of US crude oil.

West added that President Barack Obama is focused on “legacy searching” by championing climate change and Iranian sanctions, which do not offer political motivation for lifting the oil export ban.