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The one given in this industry is that the analyst community is consistently wrong about where the price of oil is going in the near to mid-term. Just as $100 oil was a sentiment driven price that baked in the risk of every potential negative impact on the supply chain, $28, $30 or $40 dollars is equally sentimental, assuming that any and all incremental barrels are and will be available AND demand will slow or stop.

2013 and 2015 forecasts. (forecasting sentiment is hard) Image Sources:  EIA

So let’s just step away from the current noise and focus on a non-controversial outcome… that oil will be much more valuable in the future than it is today. What, exactly, will that future look like?

Today’s pricing sentiment is driven by a global economic “Pick 6” today…

1. US production rates,
2. Saudi Arabia’s ability to grow production,
3. Iran’s latent ability to produce more oil,
4. Chinese economic slowdown and its impact on consumption,
5. Russia’s ability to add global production, and
6. OPEC’s inscrutable strategy.

Let’s stipulate a couple of assumptions.

First, people will produce existing wells at rates that aren’t sustainable to preserve cash flow or compete for market share, because the cost to drill and bring online is already sunk. Second, new wells will not be drilled if there isn’t at least an outlook to breakeven producing them. That means an expectation of a sustained price over 1-3 years or until the well has been paid out.

US Production Rates

Image Source: Drillinginfo Production Report for Unconventional US Onshore Plays (Combined MBOE 20:1) over last six years. Note the lag in production reporting means Q42015 and even some Q32015 reports are not finalized.View Full Article