January 2017, By Jim McAlister, Sr.
McAlister Investment Real Estate continues to be very bullish on the recovery of oil prices and the increasing drilling activity in the United States.
We feel that the basic conclusions made by McAlister Investment in its oil report of January 2016 Click here to read the January 2016 McAlister Oil Report are still accurate. The outlook and conclusions remain consistent with regard to the projection of the major economic events that will occur over the near term concerning demand for crude and its production.
The long-term conclusion for the production of oil and gas begins with the fact that:
Fossil fuel will provide the majority of the world's increasing energy needs for decades into the future.
By 2035, the world population will reach 8.7 billion people, an increase of 1.6 billion from 2015. The population growth will create increased demand for fossil fuel which will put pressure on the available oil and gas supply and insure a strong fuel industry for decades.
In 2035, the GDP per person will be 5% higher than in 2015.
By 2035, China will be the world’s largest economy followed by India and the United States. China and India are on pace to be 1/3 of the global population and GDP by 2035.
China will become the largest contributor to the growth of the world energy demand by 2038.
North America is positioned to be a net exporter of oil as soon as 2019.
Between now and 2035, North America will produce 50% of the tight oil market and 30% of the shale gas market to fuel global demand.
Global demand for fossil fuel will make it the majority supply source of world energy by 2035.
The primary conclusion of the study of oil and gas production and its impact on Texas and Houston’s real estate market is that the oil and gas industry will continue to be the dominant component in providing worldwide energy supply decades into the future. Houston will continue to be the focal point for the growth of oil related companies, and Texas will be a major source for growing production volume in the U.S. The long-term view is that Houston and Texas will continue to be very strong in the worldwide exploration and the production of oil and gas.
Recently, Saudi Arabia has taken the forefront to lead OPEC in attempting to move crude prices upward. The price of crude fell from $100+/bbl to less than $30/bbl in February 2016 and in January 2017 has recovered to $50+/bbl. West Texas intermediate crude oil could see a price rise to $60bbl or greater in 2017.
Given the increase in global demand coupled with restrained supply of cheap oil, it is quite possible that the price of oil may rise into the $80/bbl area by 2019. At the present time, there is very little excess oil production capacity from OPEC as well as the non-OPEC countries. As the demand for oil worldwide increases, there is a possibility that oil could be priced in excess of $90/bbl by 2021. World demand growth rate for oil in 2017 is estimated to be 1.3%/year, raising global demand for oil to $97.4MMbbl/day.
OPEC countries are near their limit to increase production of oil; however, the United States has significant oil fields which have the capacity to produce a significantly greater amount of oil than is now being extracted.
The United States has made significant gains in reducing the costs for drilling and the production of oil and gas. The U.S. supply of oil is substantial and cheap with growing reserves and a strong potential to increase annual supply to the marketplace.
In 1980, OPEC had excess capacity of 16MMbbl/d for oil production. Today, even with anticipated production cuts, OPEC is operating near full capacity and has virtually no excess to meet the growing demand in the years to come. However, the United States has significant excess capacity and in the next few years will be the dominant producer of oil in the world.
The United States was producing in excess of 9.5MMbbl/d in 1970. Production then began to decline and bottomed out at less than 4MMbbl/day in 2005.
United States production of crude oil has grown significantly since 2005 due to fracking. By 2014 the U.S. was producing in excess of 9.5MMbbl/day.
When the price of oil dropped from over $100/bbl to below $30/bbl in early 2016, the impact on United States production was to slow drilling. United States oil production dropped from 9.5MMbbl/day in 2014 to 8.5MMbbl/day in 2015.
Domestic drilling and production of shale oil has become vastly more efficient and cost effective. The Permian Basin of west Texas has seen an increase in oil rig counts since oil prices moved up to $50+/bbl in the second half of 2016. As oil prices increase beyond $50/bbl, even more U.S. oil fields will become economically feasible and production levels will increase. It is anticipated that the United States will have the capacity to produce between 25 and 30/MMbbl/day in the mid to late 2020’s.
Recent year over year production increases in the United States have been in the 30% range. However, it is anticipated that going forward from 2017 the percentage of annual production increases will drop into single-digit growth per year.
Efficiency gain is a strong factor driving the increase in the production of both oil and gas. United States oil production is expected to rise starting in late 2016/early 2017.
Rig count is the simplest and largest indicator of coming production change. Drilling rigs peaked in the United States in 2014 at approximately 1800 rigs working daily. Rig count dropped to approximately 500 rigs in early 2016 but is expected to rise to over 1000 rigs daily by 2018.
The primary challenge in 2017 for increasing oil production in the United States is mobilizing the work force. Over 50% of oil field labor was laid off between 2014 and 2016 and staffing back up with skilled workers takes time.
The second challenge is the balance sheet and cash flow of oil companies that have been negatively impacted by the decline in oil price and the limited capital available for investment by oil companies. Investment for oil and gas exploration is further limited because banks are less anxious to lend for drilling purposes than they were in 2014.
Large cap oil and gas companies are spending less in 2016 for exploration and development than they were in 2013 by approximately 50%. However, it appears that both large and small oil developers are now cautiously increasing their budget for E & P.
OPEC will take steps to freeze oil production beginning in January 2017 in order to help stabilize prices at higher levels. The big question is whether or not Saudi Arabia and other OPEC countries will honor their commitment to reduce production.
Russia has indicated that they support a production cap. If Russia does not agree to capping production, there is a question of whether or not OPEC will continue to unilaterally cap its production. Iran seems to be currently on board with capping production; however, Iran seems to have its own agenda and can be unpredictable.
The job gain associated with the increasing production of oil and gas, including related manufacturing and oil field service segments of the Houston economy will create the demand for additional office space, retail space and housing. It is extremely important to understand the growth impact of oil exploration and production on the economy for both Houston and Texas.
Texas, and particularly Houston, will see increased job growth as producers increase activity and oil field workers and administrative staff return to meet the employment demand for additional exploration and development in 2017 and beyond.
The GDP for Houston in 2015 was $503 billion and stands to benefit greatly with the addition of higher paying oil & gas jobs in 2016 and 2017. If Houston was a state, its economy would rank ninth in the U.S. following New Jersey, which had a GDP of $568 billion. If the Houston MSA was an independent nation, its economy would rank as the 23rd largest in the world behind Taiwan.
The U.S. economy is growing and increasing its demand for oil. GDP growth in 2016 will create approximately 187,000 new jobs. It is also currently estimated that 169,000 jobs will be created in 2017. The U.S GDP growth rate is slow coming out of the recession but it is expected to grow more rapidly in 2017 and into the 2020’s. The U.S. should be increasing demand for oil and gas for both short term and long term periods
Houston is a dynamic and growing city with a diverse economy that will benefit even more with the recovery of domestic oil production. The land that encompasses the Houston MSA covers 9444 sq. miles, an area larger than New Jersey. In 2015, the City of Houston issued building permits for construction valued at $8.2 billion, and Houston area automobile dealers sold 376,000 new cars trucks and SUV’s.
From 2010 through 2014, Houston gained nearly 500,000 jobs. The job growth begin to slow in 2014 due to the drop in price for oil. Despite the slowdown in oil, the Texas economy has and should continue to do well. According to recent Dallas Fed report, overall broad indicators of the Texas economy continue to point toward sustained job growth in the months ahead. In a report released in January 2017 the Dallas Fed projected that Texas will add 50,000 more jobs in 2017 than it did in 2016. Accordingly, the stabilization of the energy sector, recent improvements in the manufacturing sector and increased optimism by Texas businesses, the Texas economy is poised to improve at a greater rate in 2017.
Jim McAlister, Sr.