The Energy Report: John, oil and gas prices have rallied a bit recently. Have we established a bottom?
John Ragozzino: Yes. In our recently published Global Energy Research “Commodity Price Revisions” report, we are calling for a meaningful V-shaped recovery beginning in the back half of 2015 and into 2016. This is not significantly different from our prior forecasts, as we adjusted our price forecasts to $54 per barrel ($54/bbl) from $53/bbl in 2015, and from $77/bbl to $74/bbl in 2016.
Our thesis on crude oil is largely predicated upon a deceleration of non-OPEC supply growth, as we’ve seen the U.S. onshore rig count drop by more than half over the last five or six months. Additionally, we are seeing a growing inventory of uncompleted unconventional wells, as operators defer completions to an environment of better pricing and higher returns. When you combine these two factors with a global demand picture that calls for roughly 1.0–1.1 million barrels (1.0–1.1 MMbbl) of annual demand growth over the 2015–2016 time frame, it doesn’t take long before the global oversupply situation is largely eroded and we find ourselves back in a state of equilibrium. I think that will be the meaningful catalyst that gets us to higher prices in 2016. Our long-term deck remains unchanged at $84/bbl West Texas Intermediate (WTI) and $90/bbl Brent.
“Upstream MLPs are looking healthier after cutting distributions and making meaningful reductions in spending plans for 2015.”
On the gas side, I wouldn’t say that statement holds quite as well, because we continue to see new lows on Henry Hub natural gas prices. We can probably expect a continuation of anemic demand growth until the middle 2015, at the very least. That should mark the beginning of a phase of meaningful coal generation retirement, which could result in 2–3 billion cubic …read more