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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: U.S. E&P Budgeting at Sub-$40 = Less Drilling, Production and Tighter 2017 Oil Markets
February 8, 2016

Timing of the budgeting cycle has a bigger impact on the global supply/demand equation for oil than you think.

2016 has gotten off to an ugly start, with oil prices dropping below $30 in January, and 2016 oil futures trading well below $40 year to date. In the face of a crude futures strip that we view as simply unsustainable, and many sell-side shops capitulating and calling for oil to remain at current levels, we stand by our $50 oil price forecast as the right price to a balanced market in mid- to late-2016. That said, we do believe that the current strip will have a meaningful impact on 2016 drilling and completion spending budgets for E&Ps. With extremely depressed oil pricing likely to cause oilfield spending, and therefore, activity to fall off a cliff in early 2016, we do not believe oilfield spending can catch up with rising cash flows in the back half of the year. The need for E&Ps to see "sustained" higher crude prices, as well as constraints on the oilfield service side of the industry (particularly labor), will likely see rig additions delayed. As such, we have reduced our average 2016 total U.S. rig count by 19% (or 120 rigs), or down 49% y/y. In 2017 we still expect to see a corresponding surge in activity, with the rig count expected to climb 106% (or 530 rigs) y/y.

Our updated rig count forecast also has a meaningful impact on U.S. crude production, and, in turn, the global oil supply/demand equation. On a 20% reduction in our average 2016 total U.S. rig count forecast, we expect to see a decline in U.S. liquids production of 200,000 bpd in 2016 and another 250,000 bpd reduction from our prior 2017 model. On a global scale, this moves up the first crude inventory draw by one quarter to 2Q16. However, the larger impact is seen in 2017, with our oil supply/demand model tightening by about 400,000 bpd on the reduced U.S. crude output. In total, we now expect 2017 to show a global crude market that is ~1.4 million bpd undersupplied in 2017, significantly tighter than our prior expectation for a ~1.0 million undersupply. Low prices are curing low prices and we are setting up for the the cycle to turn.