Barclays' Cohen On Oil Topping $60

Michael Cohen is head of energy markets research at Barclays. He is responsible for the firm’s research covering developments in North American energy markets as well as its oil and natural gas forecasts. Prior to Cohen’s role at Barclays, he worked as a senior member of the Oil Industries and Markets division at the International Energy Agency and as an economist at the Energy Information Administration. ETF.com spoke with him recently about the latest developments in the oil and natural gas markets.

ETF.com: Do you think the impact from Hurricane Harvey on the oil industry will be long-lasting?

Michael Cohen: This is not a problem that's going to be easily solved. Refining capacity continues to be offline throughout the region. The biggest issue is that when you have saltwater flooding, you have problems restarting pumps and getting most of the water out.

Then you have to run leak detection surveys on all the pipelines in the area. Even though a refinery may be up and running, you may have production that’s not yet moving because the pipeline is not fully up and running.

Seawater leaves a residue. It can ruin the motors and other devices. Sometimes water can damage insulation as well. There can be a lengthy dry-out procedure. Between that and having to clean out all the debris that’s in a refinery or another facility, it can be weeks, if not months, where these refineries are not up and running at their full capacity.

From that perspective, we're not anywhere near out of the woods yet. The impacts are going to be felt throughout the coming month and the coming quarter.

ETF.com: It looks like the biggest impact from the hurricane has been on the refining side. Oil prices remain in their trading range even with the storm. Do you think, ultimately, oil will break out above $50 or below $40?

Cohen: The odds are more in favor of a breakout above $50, given the broader market dynamic, which is that global supply and global demand are moving into deficits in the third and fourth quarter.

The deficit that you've got in coming quarters, coupled with the geopolitical risk associated with what's going on in Venezuela, makes our bias skew to the upside when we look at prices for the balance of this year.

ETF.com: Do you think U.S. production has a shot to reach a new record high this year?

Cohen: We have it getting almost to 9.8 million to 9.9 million barrels per day by the end of the year, which is a record. Generally, we still see a very strong production picture. The hurricane and its associated effect may hinder that, but I don't think we're going to see permanent damage in offshore facilities.

It's the onshore facilities, especially shale facilities, that are the ones I'm most concerned about. If companies can't get out and drill and complete wells, you may not have an immediate production impact, but three or four months down the road, it means production may be 100,000 or 200,000 barrels per day less than what you’d have expected otherwise.       

ETF.com: Long term, are oil prices in the $40-50 range enough to keep global supply growing at a pace that keeps up with demand?

Cohen: In the next two to three years, we think prices in the $50-55 range will get you enough supply to keep up with demand. For the projects coming on line between now and 2018-2020, money was spent on them several years ago. Thus, companies have every incentive to get those across the finish line.

When you move into the 2020-2025 time frame, the decline rates at existing fields will accelerate, and investment is likely to shift from some of the more long-term projects. At that point, you're going see a tail-off in the sanctioning of new projects.

Moreover, the spending levels were much lower in 2015-2017, which means the slate of new projects coming on line is going to take a hit.

For the next three years, through 2020, there are still ample new supplies coming on, and the resiliency and improved productivity of shale means that at a lower price—namely, in the $50-55 range—that can fill the void.

But that means the voids get bigger and bigger once you get into the post-2020 time frame, and that will require prices moving back up into the $60-70 range at that point.

ETF.com: What's your take on natural gas? It's been stuck in the doldrums below $3/mmbtu.

Cohen: For natural gas, we expect prices to be pretty range-bound. We see it trading below $3 next year.
The story with natural gas is there's just a lot of supply and not a lot of incremental demand. The incremental demand is related to an increase in exports to Mexico and an increase in LNG exports.

But the problem is that those incremental exports are not really sufficient to overtake the fact that in the Marcellus, Haynesville and in the Permian, you've got so much new supply.

Remember, for the last two to three years, the increase in production from the Northeast was constrained by a lack of pipeline capacity. As we move into the next year and a half, a lot of those pipelines are getting completed and those gas volumes are going to finally be able to start flowing.

On the other hand, if we see lower oil prices, that could start to cut off the incremental associated gas production and lead to a higher price forecast than what we're currently anticipating right now.

The other way you would get a higher price forecast than what we think right now is if we have a normal winter rather than the warmer-than-normal winters we've had in recent years.

ETF.com: What's your favorite energy trade right now?

Cohen: In the aftermath of Hurricane Harvey, we've seen contango in the oil market move back out. In other words, the contango is much steeper for WTI than it was before. But based on our outlook for the next six months, we think the WTI curve could slip into backwardation at some point.

Likewise, the WTI-Brent spread is likely to narrow from current levels around $5-6.

Contact Sumit Roy at [email protected]