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U.S. Crude Output Predicted to Jump 20% by Year's End

Full-year U.S. crude production, excluding natural gas liquids (NGL), will jump by 20% by the end of this year, a full seven years ahead of Energy Information Administration (EIA) projections, Raymond James & Associates Inc. said Monday.

"After conducting a detailed, proprietary, bottoms-up analysis on play-by-play oil production from the major onshore U.S. liquids plays, we now expect the current growth trend in U.S. oil supply to accelerate sharply in the coming years," wrote J. Marshall Adkins and his colleagues. "The numbers are crazy. We're now forecasting that U.S. oil production (excluding NGLs) will grow from 5.6 million b/d in 2010 to a whopping 9.1 million b/d in 2015. Including NGLs, total U.S. petroleum liquid production grows 60% from 7.7 million b/d in 2010 to 12.2 million b/d in 2015."

The analysis "does not account for potential production from the Utica [shale] or growing Canadian oilsands supply, which would only provide upside to the readily available crude supply in the U.S. Coupling all of these factors, U.S. imports will continue to decline and OPEC spare capacity will drift bearishly higher in coming years."

Because of the expected oil supply gusher, Raymond James has reduced 2013 West Texas Intermediate (WTI) forecasts to $90/bbl from $105. For Brent crude, the 2013 forecast was reduced to $95/bbl from $110. Long-term oil forecasts (beyond five years) were reduced to $90/bbl WTI and $95 Brent from $125.

"Just a few short years ago, everyone was looking to big deepwater plays in Brazil and West Africa for non-OPEC oil supply growth," noted Adkins and his colleagues. "Well, leave the rowboat in the shed because the true near-term driver for non-OPEC oil supply is now right in your backyard. After decades of steady declines, U.S. oil production has made an abrupt about-face that is driving the resurgence in non-OPEC supply."

Raymond James has long been bullish on oil prices mostly on the perception that non-OPEC supply has been in the process of flat lining and OPEC producers have minimal excess production capacity.

"We still believe OPEC's excess capacity is well below the cartel's official estimates, but our outlook for U.S. oil supply growth has forced us to completely change our tune about non-OPEC supply," said Adkins. "Although geopolitical events and potential supply disruptions would provide upside to our oil price estimates, our global oil supply-demand model is simply too loose to support our current rising price deck...under our long-term (five-year) forecast."

Combining current rig counts with Raymond James' projections for future growth, the analysts modeled onshore oil production by play for what they perceive to be the most prominent growth drivers in U.S. oil production: the Eagle Ford, Barnett and Cana Woodford shales, as well as the Williston, Permian, Denver-Julesburg (DJ) and Niobrara basins, and the Granite Wash and Mississippi Lime formations.

"We now see mind-boggling growth from these plays through 2015," said the Raymond James team.

"The primary drivers behind the growth in U.S. onshore crude production are the Williston, Permian (horizontal and vertical) and Eagle Ford plays," they wrote. "Currently, these three plays account for roughly 40% of U.S. onshore oil production. By 2015, however, we estimate they will account for almost two-thirds of total U.S. onshore output."

About half (55%) of the 415-plus rigs in the U.S. oil rig count in 2011 came from the Eagle Ford and Permian alone, and "we continue to believe a hefty portion of the 200 incremental oil rigs we're modeling for 2012 will be allocated to these two Texas plays. The Williston Basin also stands to see substantial growth as pipeline and rail capacity comes online this year and alleviates infrastructure constraints."

Beyond the Eagle Ford, Permian and Williston plays, "growth contribution from onshore liquids-rich plays "will be comparatively small. Combined, the crude production (i.e., not including NGLs) from the Cana Woodford, Barnett, DJ Basin/Niobrara, Granite Wash and Mississippi Lime made up 3.6% (141,000 b/d) of total onshore crude production in 2010."

While U.S. crude oil production has declined at an annualized trend-line rate of 2.1% per year since 1985, there have been year-over-year increases in the past three years, including an estimated 3.3% increase in 2011, according to EIA and NGI's Shale Daily calculations.

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