U.S. Oil & Gas Industry
 Development of both oil and natural gas
reserves in the United States is essential to
meet future demand for energy
 The United States currently produces ~11% of
global crude oil supply
 The United States is the largest producer and
consumer of natural gas
Oil Market History Lesson
30 Year Chart
Where are we today?
What impacts Oil Prices?
 Supply and Demand
 Strength of the U.S. Dollar
 Global Stability – primarily the Middle
Macro View:
Over the long haul, the
Supply / Demand Fundamentals will drive
up the price of oil
 Global Demand for energy is “relentless”
 IEA: Demand for oil is expected to increase by 3.0
million barrels per day from 2014 to 2016.
 Non-OPEC production grow has stopped and is
now on decline. U.S. production peaked at 9.6
million barrels per day and will drop to 8.0 million
barrels per day by end of 2016.
 Oil “Price Wars” have historically lasted two year.
This one is on the same path.
Demand for oil is “Relentless”
U.S Active Rig Count
Less New Wells = Falling Production
International Active Rig Count
Less New Wells = Falling Production
 December, 2012
3,539
 December, 2013
3,478
 December, 2014
3,570
 December, 2015
1,969
The rate of decline has accelerated since Q1 2015
EIA: Drilling Productivity Report
Total U.S. oil production peaked at 9.6 MMBOPD
and now stand at 9.1 MMBOPD: Onshore declines
have been offset by offshore increases
Non-OPEC Oil Supply
60% of the World’s Oil Supply
Geopolitical Risk Premium
remains part of the equation
We are still very dependent
on oil supply from the
Middle East and N. Africa
Iran continues to expand its
influence, which is a threat
to Saudi Arabia
ALL OF THE WORLD’S SPARE
OIL PRODUCTION CAPACITY
IS ON THIS MAP
What are other analysts saying?
 Goldman Sachs (Jan. 15, 2016)
 “The key theme for 2016 will be real
fundamental adjustments that can rebalance the markets to create the birth of a
new bull market, which we see happening
late in 2016.”
 “Oil will turn into a new bull market before
the year is out as the price rout shuts down
sufficient production to erode the global
glut.”
 “A flat futures curve near cash costs is
historically the buy signal.”
What are the risks?
 Demand Weakness
 IEA expects 1.0 MM bbl per day increase
 Chinese Economy slowdown is a real concern
 Supply Growth
 Iran post-sanctions s/b +500,000 BOPD
 Iraq and Libya: Some growth anticipated
 U.S. Dollar keeps getting stronger
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The conditions leading to the 2014 oil collapse such as
record capex, strong non-OPEC supply growth and
weak demand have been reversed.
OPEC’s 2015 supply surge is unlikely to be repeated.
Global decline rate will likely accelerate in 2016 and
beyond.
Global inventories remain elevated, and will take at
least a year of sizable supply deficits to reduce.
Oil prices are too low to incentivize new supply, the
prospects of an oil shortage in 2017 to 2019 are
increasing.
Most supply and demand models indicate a balancing
market by the 2nd half of 2016. Capex cuts will
increasingly impact global supply as we approach 2017.
There is an increasing chance that OPEC/Saudi Arabia
will act to reduce supply in the next six months if the
prices fail to rally above $50 Brent.
OPEC excess capacity is limited, comparisons to the
1908’s are misguided.
Current prices are trading at the cash marginal cost,
which has historically represented the bottom for the
oil price.
A renewed sharp appreciation in the US dollar from
current levels appear highly unlikely.
Conclusion
“I buy when everyone is selling”
- J. Paul Getty