Oil Prices Hit Historic High On Weak Dollar

Investment bank Raymond James has updated its US oil and natural gas liquids production forecast, with new estimates suggesting that the country could produce enough oil to satisfy domestic demand in less than ten years’ time.

“The U.S. could easily be approaching the ‘holy grail’ of net oil ‘energy independence’ toward the end of the decade,” the bank’s analysts said in an energy statistics report released today.

“Consensus US oil supply growth estimates are still too low,” says Raymond James. “It is clear that exploration and production companies have continued to improve oil extraction technology faster than the rock quality has deteriorated.”

Raymond James is forecasting that US liquids production – encompassing crude oil and natural gas liquids – will average 16.4 million barrels per day at the end of the decade. This is “at the low end of the likely range”, the bank said. “If technology continues to advance, that number could easily be close to 18 MM bbl/d by the end of this decade.”

The US is currently producing around 10 MM bbl/d and importing about 6.5 MM bbl/d of oil and refined products. If US output rises by 6-8 MMbbl/d, per Raymond James’ forecast, “that would suggest that the US will not need to import any net crude/refined product by the end of the decade, assuming demand stays flat”.

Raymond James came under fire for a robust US oil production forecast it released in early 2012, which critics considered overly optimistic. But actual output has exceeded those projections.

“Year-to-date, oil production has already been tracking 200,000 bbl/d above our original forecast,” the report said. “More importantly, the drivers of the larger-than-expected oil supply growth – higher well productivity and better drilling efficiencies – have been accelerating, not slowing.”

“We now think US crude-only production will exit 2014 above 9.5 million barrels per day and combined crude/NGL production will exit 2014 above 12.5 MM bbl/d,” the bank said.

Raymond James acknowledged in the report that production growth appeared to stall in mid-June of this year, but said that was “an aberration, with domestic US supply now rising much faster than even the most aggressive forecasts”.  And while NGL output growth came in lower than expected, “this is a temporary phenomenon caused by infrastructure and NGL demand constraints that should be alleviated over time”, the bank said.

But even if the US is capable of growing oil output to the levels that Raymond James is forecasting, the proper incentives must be in place to encourage drillers to keep drilling.

“The one thing that could completely throw off this analysis is our assumption that oil export laws must change to allow the free flow of oil into and out of our country. If the U.S. continues to disallow oil exports, then local U.S. oil prices – i.e., West Texas Intermediate (WTI) – and drilling activity would likely suffer for some time,” the bank said.

It is also worth noting that Raymond James is referring to “net” oil independence, not oil autarky. Even if the US can produce the volumes of oil, NGLs and products required to meet domestic needs, it does not necessarily follow that the US would see net economic benefits from cutting itself off from global oil markets.