Credit Suisse

Clearly in surplus, we believe global oil markets are at a tipping point. Either Saudi Arabia cuts oil production or lower prices will force producers to adjust.

This note is about the latter case and we will walk you through "the five stages" of upstream loss and grief involved in a price shock, with average oil prices of $75 per barrel of West Texas Intermediate (WTI). The first stage is denial.

Anger -- Our play-by-play rig-based U.S. upstream model cuts production growth in the Bakken, Eagle Ford, Permian and other tight oil plays from more than 1 million barrels per day in each of the last few years to only 200,000 barrels per day (b/d) per year increment in year one of $75 oil. Evidently, however, inertia (or denial, anger, bargaining and access to capital) delays that response. Ultimately though, in the U.S. and globally, declines in the about 40 million barrels per day (Mb/d) of older fields should accelerate and a cash-strapped industry will likely seek to defer big new capital commitments.

Bargaining -- This will likely not be pleasant, but within a scant few years, the redirection of capital and a more general living-within-one's means attitude will likely enhance productivity and drive down costs. Critically, in our view, steady state growth within the U.S. shale universe, will rise back up to about 500,000 b/d per year as soon as 2016-2018.

Depression -- This too will pass, in our view. Oil demand should get a lift from lower prices, in due course. Simply put, on a global level an oil-consumption tax would be reduced by about 20% (from a five-year rolling average of Brent oil at $100 a barrel today to $82). Fully import dependent economies such as Japan and South Korea face less of an energy headwind, and the U.S. consumer can use its dollars to consume other products, outweighing the negative effect of reducing the generally less productive super-normal surpluses of Gulf Cooperation Council (GCC) oil-exporting economies or intensifying pain for less-fortunate sovereign producers.

Acceptance -- In the longer run, say from 2017-2018 forward, it becomes increasingly obvious to us that less-well-mitigated decline rates, project deferrals and resilient oil-demand growth may add up to the need for more capacity growth. Ultimately, the industry will very likely need to resuscitate large offshore and other big-ticket projects. Whether we will see $100-a-barrel oil again depends in part on how successfully majors barter down service costs.

-- Jan Stuart

-- Edward Westlake

-- Johannes Van Der Tuin

To be considered for the Soapbox feature, please submit an original article of less than 1,000 words to research@barrons.com with "Soapbox Submission" in the headline. Please include your daytime telephone number and credentials.

The opinions contained in Investors' Soapbox in no way represent those of Barrons.com or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s).

Comments? E-mail us at online.editors@barrons.com

 
 
 

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

Credit Suisse (NYSE:CS)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Credit Suisse Charts.
Credit Suisse (NYSE:CS)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Credit Suisse Charts.