OP: What can we realistically expect from the OPEC/non-OPEC meeting in Doha?

MR: At most, countries may agree to freeze output, which may sound encouraging but in reality is little more than an agreement of the lowest common denominator since they are basically capacity constrained to begin with. To defend a price, OPEC would need to actively take barrels “out of the hands” of refiners – that is, a production cut, the current prospects for which lie somewhere between slim and none.

OP: Do you expect oil to fall back below $30 if Doha turns out to be disappointing?

MR: No, but that’s partly because we think the oil balance will be transitioning into a deficit in 2Q and because many will come to realize that a production freeze is not a viable plan to cause the oil balance to tighten.

OP: The oil industry is making massive cuts in investment. Should we be bracing ourselves for a price shock at some point in time? If yes when do you see this occurring?

MR: You cannot cut CAPEX and reduce upstream activity and somehow think future production growth goes unaffected. We forecast non-OPEC supply to contract this year for the first time since 2008. That was a way-out-of-consensus call to make a year-ago when most pundits vigorously argued non-OPEC production would still expand even with the drop in oil prices. What we’ve communicated to our clients – and those we deal with directly in OPEC – is that the spike down in oil prices is basically setting up an eventual spike up.

OP: Will bankruptcies in the U.S. shale industry do anything to balance the market?

MR: We expect that it will feed into the contraction we forecast for U.S. output. We also see the credit availability issue as likely being a limiting factor moving forward, sort of like what we saw in 1986 and then again in 1999.

OP: Where should investors look if they want to put money in the energy market? What types of companies will perform well over the next year?

MR: Since energy equities basically trade as a proxy for the commodity, it’s safe to say all boats rise when the tide comes in. The ‘beta” names typically include the Oil Services sector and E&Ps. The most leveraged play would be the commodity itself (or a vehicle like the USO).

OP: Lenders to the oil and gas industry have been fairly lenient with companies. Do you believe that the banks will start to tighten the screws a bit more as the periodic credit redetermination period finishes up?

MR: The old joke is that bankers are the guys who will lend you an umbrella and then ask to have it returned as soon as it starts to rain. Yes, we think lending will become much more highly scrutinized and financing less readily available.

OP: Can oil break out from $40 per barrel anytime soon?

MR: Sure. All it takes is one outage of consequence. More generally, though, we think oil breaches $40 during 2Q as physical evidence becomes available about inventories drawing down globally.

OP: Where can you see oil heading over the next 3 months, 6 months and 1 year out?

MR: Our target is Brent crude at $85 by the end of 2016.

OP: How do you see the U.S. presidential elections impact U.S. oil and gas policies? What could be the most radical change for oil and gas?

MR: Ask me after the election…

OP: Thanks for taking the time to speak with us Mike.

(Republished with permission from oilprice.com)

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