Image source: Enerplus.
Recently, an analyst from Guggenheim put out a new report suggesting three catalysts that could propel crude to reclaim triple digits by 2018, if not sooner. It's a bold call to say the least, especially when most analysts on Wall Street, not to mention nearly the entire oil industry, see oil prices staying lower for much longer. That said, while it's clearly the contrarian view, it's easy to see how these catalysts could come to fruition.
1. It's tough to turn around a sinking vessel
The first potential catalyst fueling crude oil is that it could be much more difficult than expected to reverse production declines after years of underinvestment. Specifically, Guggenheim expects that second-tier oil nations (i.e., ex-OPEC, U.S. and Russia) will have a tough time managing production declines. There's 27.7 million barrels of daily oil production, or a third of global production, coming from places like Canada, Mexico, Norway, and Brazil and because of weak oil prices, producers in these countries have cut back on investments, leading production to begin to naturally decline by an annual rate of 2.5%, or about 700,000 barrels.
For an example of this, Canadian oil producer Enerplus (ERF -1.52%) had targeted to spend $540 million in 2015, but it now expects to spend $510 million and produce roughly 106,000 barrels of oil equivalent per day. Looking ahead to 2016, Enerplus expects to reduce spending to $350 million, which is projected to deliver production ranging from 100,000 to 105,000 BOE/d. The only way to reverse this decline is to pump more cash into drilling new wells, which isn't something Enerplus or its peers are comfortable doing until oil prices rebound.
2. ISIS and the oil market
Another emerging catalyst pointed out by Guggenheim is the potential for an escalation of the conflict in Syria, with it potentially spilling into a regional war and impacting oil supplies. There are a number of scenarios that could play out leading to an oil price spike. ISIS could potentially take over the major oil fields in southern Iraq to either disrupt supply or sell the oil itself. In fact, one of the key funding sources of ISIS is oil, with it estimated to generate a half billion dollars a year from oil sales. On the other hand, ISIS could attack oil fields in the Gulf, such as those in Saudi Arabia, or even disrupt the global oil trade via terrorist attacks on key shipping infrastructure in an effort to spike oil prices.
In addition to this, Gulf nations could divert funds that would have been used to increase oil production and spend it instead on military or social service investments in an effort to prevent ISIS from attacking from within.
Image source: ConocoPhillips.
3. High oil prices are needed to restart U.S. production growth
Finally, Guggenheim sees a further slowdown in U.S. shale drilling in 2016, leading to declining well productivity in 2017 and limiting production growth in the coming years. It was a sentiment echoed by U.S. oil giant ConocoPhillips (COP -0.93%) at a recent industry conference. Matt Fox, ConocoPhillips' EVP of E&P, said that according to its model, oil prices would need to be in the $50 to $55 per barrel range just to deliver modest growth from shale plays in the U.S. However, with global oil demand growing by more than 1 million barrels per day, ConocoPhillips believes oil prices would need to be at least in the $80 to $85 per barrel range to meet that 1 million barrels a day growth via increased U.S. shale production.
Further, if more production was needed to offset worldwide supply declines, or a supply disruption, the implication is that oil prices would need to be even higher.
Investor takeaway
The stage is certainly set for a return to $100 oil. However, a lot would have to go right, or in some cases very wrong, for that price to be reclaimed as quickly as 2018. That said, even if crude doesn't quickly reclaim triple digits, there does appear to be considerable upside potential for oil prices, which would certainly lift oil stocks out of their current doldrums.
