American Oil and Gas Reporter - June 2021 - 32

and optimize, " Adams states. " We are
not yet seeing the big companies shed
assets, but I am expecting the third and
fourth quarters to be good for acquisition
and divestiture activity. "
So far, potential buyers and sellers
have had a hard time aligning, but Adams
says there have been good reasons for
that. " Seasoned veterans have been telling
me that they are being a lot pickier, " he
goes on. " It is something of a reckoning
given tighter capital access and the fact
that so much private equity has withdrawn
from the market. That will have a longterm
effect from an A&D standpoint. "
That said, Adams stresses that the
A&D spin cycle very likely will pick up
speed in the back half of the year. " No
matter how bleak it may feel sometimes,
the wheel does not stop turning entirely,
especially for private operators, " he comments.
" Family-owned companies, in particular,
are holding some cards because
they can fund their own development. "
The biggest impediment to A&D activity
has been low futures prices, Adams explains.
" The gap between current strip and longerterm
futures prices is where the value differential
is, " he concludes. " The gap will
start to close when strip prices rise. That
FIGURE 1
Actual and Forecast Oil Inventories (OECD Days of Consumption versus Oil Price)
35
34
OECD days of
consumption
33
32
31
30
29
28
27
26
20.00
Normalized OECD days of
consumption level of 30 days
WTI Prices
30.00
is when people will get optimistic. "
Bullish Fundamentals
J. Marshall Adkins, managing director
and head of energy investment banking
at Raymond James & Associates Inc.,
projects that strip prices will indeed churn
higher in the near future. In fact, Adkins
says fundamentals in the global oil markets
remain much more bullish than what is
reflected by futures prices. " Our oil forecast
is $18/bbl higher than 2022-23 futures
price expectations, " he reports.
Backwardation continues to be the order
of the day in the oil market, with
West Texas Intermediate spot prices in
late May trading 5% higher than the May
2022 WTI futures price and more than
10% higher than the May 2023 future
price. Since the start of the year, WTI
has rallied $15 a barrel, but consistent
backwardation in the futures strip has
had the effect of encouraging oil out of
storage to take advantage of near-term
pricing, Adkins notes.
How much has storage been drawn
down? Between May 2020 and January
2021, global oil inventories were down
2 million barrels a day, with U.S. inventories
down 1 MMbbl/d, according
to Adkins. That has oil inventories not
only quickly normalizing with historic
trends heading into summer, but puts
inventories in position to fall well below
normal beginning in the second half of
the year (Figure 1).
" With inventories nearing normal and
demand poised to surge over the next six
to 12 months, prices have meaningful
upside, " he remarks. " Recovering demand
and lower supply has already led to an
undersupplied oil market, and fundamentals
point to WTI reaching $75/bbl within
the next six months. Even with OPEC+
producing at maximum capacity in 2022,
there will be zero margin for error on
supply disruptions. "
❒
Coming In July
AOGR celebrates Devon Energy's
golden anniversary by profiling the
company's unique journey from its
founding in 1971 to becoming a true
blueblood among U.S. independents,
capped by its milestone merger this
year with WPX Energy.
40.00
50.00
60.00
70.00
80.00
Source: EIA, Raymond James research (Assumes 1/2 the expected global inventory build goes to OECD inventories)
32 THE AMERICAN OIL & GAS REPORTER
Assumes $70+/Bbl Oil
OECD Days of Consumption
1Q15
2Q15
3Q15
4Q15
1Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20 E
3Q20 E
4Q20 E
1Q21 E
2Q21 E
3Q21 E
4Q21 E
1Q22 E
2Q22 E
3Q22 E
4Q22 E
WTI Prices ($/Bbl)
2Q16

American Oil and Gas Reporter - June 2021

Table of Contents for the Digital Edition of American Oil and Gas Reporter - June 2021