November 17, 2023
Pickering forecasts oil around $80/bbl through 2027 and calls $75/bbl-$90/bbl the current sweet spot for pricing.
After enduring the “lower for longer” downcycle that started in 2014, the question is how long the good times will last, now that they’re here.
Dan Pickering, chief investment officer at Pickering Energy Partners, believes the oil and gas industry is in a strong upcycle. Speaking during the “How & When Can We Grow Organically?” session at Hart Energy’s Energy Capital Conference in Dallas on Oct. 2, he said certain activities and behaviors tend to occur near the end of an upcycle.
Those activities and behaviors include enthusiasm and the belief that the good times will last forever, he said.
“There’s a ton of enthusiasm for the sector” due to better oil prices, even though it’s not performing as well on the S&P now as it has in the past, Pickering said. “ ‘This time is different.’ Famous last words,” he said.
A surge of capital can also signal the coming end of an upcycle, he said.
“Capital inflows typically in a bull cycle toward the top. You have to fight the money off. It really wants to get invested. It really wants to be involved, whether that's public money or private money. And I would say we're not seeing that,” Pickering said.
“Meaningful” consolidation typically happens as an upcycle ends, but Pickering is not seeing massive amounts of consolidation happening currently.
“If you think back to cycles of the past of most industries, what happens right toward the end, everybody gets so excited they have to buy each other, and we're seeing a lot of consolidation now, but we're not seeing the BP-Amoco-Arco, the Chevron-Texaco type of consolidation,” he said, adding he believes that type of consolidation is still years away. “[Right now] is sort of at the beginning sort of an upcycle, from my perspective.”
Forecast: $80/bbl through 2027
Oil prices have improved due to a number of factors, including a fundamentally tight market and the fact that the “recession we’ve been afraid of hasn’t happened,” he said.
Oil prices are working, he said.
“Now oil's working. It has a tendency to work when it's working and the fundamentals are pretty decent,” Pickering said.
He sees the sweet spot of oil pricing at between $75/bbl and $90/bbl and forecasts oil to be around $80/bbl through 2027.
“For those of you in the room that have heard me talk before, I mean $80 is the highest I've ever been willing to go on record for any kind of a forecast, and I've never been willing to go from 2023 to 2027, that long a time period,” he said. “I just think it's a pretty tight market with some good underlying dynamics.”
Pickering said the U.S. oil and gas industry no longer does well at $50/bbl, or even $60/bbl, but that over $100 is not sustainable for consumers.
“Over $100/bbl, you're starting to hit people in the pocketbook on the consumer side, and we just don't want that as an industry,” he said.
The next thing? Rigs
At one point, U.S. production “bottomed” at 11 MMbbl/d but has now almost returned to 13 MMbbl/d, he said.
“There's plenty of good rock, there's just a lot less than there was,” he said.
That means that operators are busy thinking about the next thing.
“We're hearing about even longer laterals. It was one section, now it's two sections. It's 15,000-ft laterals,” Pickering said. “There's not enough of that to really move the needle. And I don't think you're going to make a meaningful move above our prior peaks without rig count.”
U.S. production will remain around 13 MMbbl until it begins to add rigs, he said.
“I think we finish this cycle with the U.S. heading to 14 [million barrels per day] or 15 million barrels a day and a higher level, the only way we're going to get there is rig count,” he said. “We can't get there with new technology.”
Global production
At the same time, he believes Russian production will slowly atrophy in response to continued global punishment of the country for its war against Ukraine.
“The reality is that the world's practical. We want to punish Russia, the developed world wants to punish Russia for being a bad actor, but they export 8 million barrels a day of crude products, and you turn that off and you’ve just stuck a knife in your own eyes. So we're trying to have our cake and eat it, too,” Pickering said.
In five years or so, he said, it’s likely Russian production will have dropped by a “couple million barrels a day, but there won’t be any ‘A-ha’ moment around it.”
One question will be around how Europe replaces hydrocarbons from Russia over time.
“Everybody globally is scrambling to build out LNG and deliver gas into Europe. The question will be a combination of Norway gas, plus pipeline gas in, … plus LNG. Do we wind up oversupplying Europe at some point? Do we overbuild LNG?” Pickering asked. That is, he said, a “back half of this decade issue. So I'm not worried about it yet.”
Saudi Arabia, he noted, is aggressively protecting oil prices.
“The real debate around OPEC is going to be ‘what price does Saudi want to live with?’” he said.
Energy transition, or the boiled frog
The energy transition could make the oil and gas business more difficult, but it could make it more profitable, as well. At least, he said, during the short run, as oil and gas shore up supply when there is tightness in the energy mix.
Pickering said everyone should be prepared for oil demand to peak “at some point in our lifetime,” and for gas demand to peak after.
“Hydrocarbon demand is going to peak, and that renewable percentage of energy supplied, which is now at 7%, is going to be much, much higher,” he said. “We’re boiling the frog here. That's a slow-moving process.”
Achieving net zero emissions by 2050 won’t happen without some serious changes by consumers, he said.
“We're not going to make 2050 net zero unless the world gets a ton more serious about changing their consumption patterns, and getting people to change consumption patterns is really, really hard. ‘Let's save the world, but I don't want to do it,’” he said.