American Oil and Gas Reporter - January 2016 - 36

Outlook 2016
infrastructure, including refining capacity and petrochemical
facilities. The demand growth from that activity will be far lower than Iran's supply contribution, but it is a factor that should
be considered. It also is important to remember that there is a
difference between increasing crude oil output and condensate
output. Iran plans to increase its condensate output in 2016.
The other drivers of incremental demand growth are petrochemical projects, as well as increasing vehicle sales in India
and China. China also is building its strategic reserve, and is
likely to accelerate that effort next year with oil prices at multiyear lows. These factors are being offset by reduced demand
expectations from Russia and Brazil, where we expect to see
recessions in 2016. Nevertheless, they are holding the global
demand trajectory upward.

Although cycles are a constant in the oil and gas
business, it has proven very difficult to see downturns coming, and by the time the market recognizes a recovery, the upcycle often is already well under way. What
early signals of recovery should producers watch for? What
"wild cards" do you see on the horizon that could either exacerbate the supply/demand imbalance, or help rebalance
the market sooner rather than later?
COHEN: One factor to watch is the overall contango in the
market (futures prices higher than spot prices, creating an upward-sloping futures price curve). Contango should lessen as
prices rise in response to less supply and more demand, especially during peak periods when the system is firing on all pistons. Increases in U.S. refinery throughput over the course of
2016, in our view, will lead to a tighter time structure than what
the market expected in December.
As mentioned, the recovery likely will take longer if El Niño
moderates the weather, Chinese demand falls below expectations, or Libya and Iran contribute more barrels than the market expects.
Another factor to consider is the reaction to the Federal Reserve decision at its meeting in December. Ahead of that meeting, it seemed likely the Fed would raise interest rates, which
would create head winds for oil by strengthening the dollar. A
stronger dollar benefits commodity exporters that have flexible exchange rates, while reducing demand growth from major importers that have to pay for their oil in dollars.
Other sets of factors could enable the market to come into
balance more quickly. For example, the market has a perception that demand is weakening while global supply continues
to grow. If data emerge over the course of 2016 to disprove that
widely-held view, the market should begin to expect a shorterlasting supply glut and a sooner-than-expected price rebound.
And those data may indeed emerge. Global oil demand tends
to be underestimated. It is possible demand could be overestimated in 2016, but in the past decade, demand has been underestimated by an average of 800,000 bbl/d. That is obviously
significant in a market that is oversupplied by an estimated 1.0
MMbbl/d-1.5 MMbbl/d. Stronger-than-estimated demand and
a quicker-than-expected supply response, particularly in regard
to declining U.S. tight oil production, could lead to a tighter
balance.
36 THE AMERICAN OIL & GAS REPORTER

The market also will tighten if sanctions get snapped back
against Iran or if Iran is unable to increase its output as much
as the market now predicts.
To be clear, we do not see a likelihood that the market will
tighten back to pre-November 2014 levels over the course of
2016. However, we do expect prices to gradually strengthen beginning in 2016 and rebalance in the $80 range by 2020, with
2016 being a year of transition as this policy slowly takes hold.

Rise And Free Fall:
Oil Output Dropping Fast

After meteoric, multiyear growth that saw U.S. oil
production jump to its highest level in decades in
spring 2015, the EIA projected output from shale plays would
fall more than 100,000 bbl/d by year's end. How much production from tight oil plays will be lost by the end of 2016?
Which plays will see the biggest declines? How about output from nonshale basins? Could the total U.S. production
decline reach 1 MMbbl/d or more this year?
JODI QUINNELL: U.S. crude oil production peaked at 9.6
MMbbl/d in April after seven consecutive years of growth, and
has declined since by nearly 400,000 bbl/d. Genscape expects
these declines to continue into 2016 with an additional decrease
of 800,000 bbl/d by year-end. That would bring the total decline to 1.2 MMbbl/d from the April 2015 peak, driven of course,
by lower rig activity as a result of the sharp decrease in oil
prices.
The Bakken and Eagle Ford shale plays are expected to experience the sharpest declines, dropping 175,000 and 210,000
bbl/d, respectively, year-to year in 2016. The Permian Basin
will fare better than any other shale play, and is the only basin
where we are expecting even modest year-to-year growth
(15,000 bbl/d in in 2016). Driving Permian Basin growth are
superior horizontal drilling economics, proximity to key market locations, and the quality of the crude produced.

Two key factors in projecting U.S. oil production are
the large numbers of drilled but uncompleted
(DUC) wells, and productivity/efficiency gains per well
drilled versus the characteristic steep decline curves in tight
oil plays. How will the reported 5,000-plus inventory of horizontal DUCs impact production in plays such as the Bakken
and Eagle Ford? What commodity price points are necessary
to begin completing significant numbers of DUCs, how much
oil can these wells produce, and how quickly can that production be brought on line?
QUINNELL: The DUC well inventory is a hard metric to
track because each state has different reporting requirements
and procedures, and some states do not report inventory numbers at all. Therefore, we do not believe the industry truly knows

American Oil and Gas Reporter - January 2016

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