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Demand for Oil Strong Despite Anemic Global Growth

Oil Outlook

SHAWN REYNOLDS: Our outlook has not really changed much. I think the progression of oil production and supply on a global basis, and certainly here in the U.S., has unfolded in 2016 the way we thought it would, and prices are responding. It is going to be a slow, gradual climb for oil prices. We are seeing today prices around $50 a barrel for WTI crude, and we expected to see possibly $55 by the end of the year, and $65 by the end of 2017.

Implications of Slowing Global Growth

REYNOLDS: Demand for crude oil on a global basis has remained remarkably resilient. Considering the anemic global growth that we have seen so far this year, consumption is up quite strongly. At the beginning of the year, we thought that demand might increase to 1.1 to 1.2 million barrels a day. It now looks like demand will reach more like 1.4 to 1.5 million barrels a day, and might even be greater as we go into the second half of 2016. Overall, it has been surprising as to how strong demand has been.

Production Outlook

REYNOLDS: Since the rebound in prices from the low in February, we have seen a slight uptick in activity and rig count here in the United States, but we are still at basically an all-time record low for rig count. We are up perhaps 17 rigs from the low of approximately 404 rigs. This represents an all-time record low in the history of the United States. Although there has been a little bit of a rebound, we would not expect to see any sort of supply response anytime soon. In fact, we believe we are likely to continue to experience declines in production in the U.S. as we go forward, reflecting a lag effect from the 80% drop in the rig count that should start to kick in in the second half of the year.

Redeploying Capital and Rigs

REYNOLDS: I think companies will want to see prices that are $5 to $10 a barrel higher than they are today, and for a sustained period of time. I think that is the critical part. One or two months of higher prices is not enough. Companies want to have some confidence that the oil price is going to stay at a reasonable level, so that they can make a consistent profit.

Investment Opportunities

REYNOLDS: Given where oil prices are now and the little activity we have in terms of drilling, it is really the upstream E&P companies [exploration and production] that are by far the most attractive to us. Some of them are profitable today, and, hopefully, some of them will be more profitable at higher prices. There is an underlying positive, long-term structural growth story in a number of these companies, even at today's prices. That is where we see the most interest in terms of investment. As we get further into a stronger price cycle, we would hope to see a handful of oil service companies that start to see utilization of capacity increase, and then start to see margins improve. But we believe that this is some time off, and will take time.

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