An increase in oil prices is looking “increasingly certain” says Colin Welsh, head of international energy investment banking at Simmons & Company International, assuming we avoid another global recession or an implosion in the Chinese economy.
Recent US Energy Information Administration data shows that production declines in the onshore oil fields in the United States are accelerating, with Welsh predicting that “we could well see year on year production down by 1 million barrels per day by the end of 2016”.
“It’s also reasonable to expect decline rates from conventional oil production globally to be higher than normal because all oilfields naturally decline,” said Welsh.
“If they’re starved of investment they decline much faster. In the meantime, demand for oil is continuing to grow by 1.2 million barrels per day, particularly in the US, China and India,” he continued.
Although production has been shown to be decreasing in certain areas of the oil and gas sector, Welsh doesn’t expect the industry to level out until next year.
“Irrespective of what happens in Iran the market should fall into balance in the first half of 2017,” said Welsh.
“Markets always move in anticipation of changes in fundamentals. That’s why the record short crude positions have come off already and prices are already lifting. By the end of this year many analysts expect $60 crude. In the interim, expect prices to be volatile as the market weighs the extent to which shale production in the US comes back as prices lift, and the pace at which Iran can lift its production,” he added.
Welsh also believes the industry hasn’t seen the last of high oil prices, such as those experienced in 2014, due to diminishing reserves.
“The collapse in oil prices has demolished investment in new projects, the results of which will be felt in terms of diminished reserves and lower production in two or three years’ time. At that point the market could become very tight in which case a spike in oil prices to previous highs is not out of the question.”
BP’s Upstream Chief Executive Bernard Looney echoed Welsh’s sentiments Monday at the OTC conference in Houston, Texas, telling attendees during a presentation that the oil price will not be lower forever and will bounce back eventually.