Global oil demand is sputtering and WTI prices may plummet to $70 per barrel by 2015, according to James Rollyson, senior vice president at Raymond James & Associates.

Such price expectations are well below consensus estimates, but Rollyson said the same oversupply that has depressed gas prices is now at work against oil. The shale boom has been too much of a good thing.

“Our view on oil is that basically the game has changed,” said Rollyson, who spoke at an Independent Petroleum Association of America-Texas Independent Producers & Royalty Owners Association lunch in Houston.

US oil supply is up and those bullish on oil have to count on additional disruptions in the Middle East and elsewhere to keep oil prices artificially high, he said. Despite that, OPEC's excess capacity is near a 20-year high, despite 3 million barrels of oil per day falling offline since 2010.

“That scares some people,” Rollyson said. “Is Saudi going to continue taking oil off the market and if so, at what price do they do that? If not, then prices probably come down.”

North America is one of the chief culprits in oil supply, as its efficiency innovations continue to produce more and more oil. Crude supply will grow by 1.5 million barrels per day in the next several years.

Rollyson said oil has been oversupplied despite disruptions in the Middle East.

In 2014, assuming no incremental disruptions, oil production could add another couple of million barrels a day, he said.

“That's 750 million barrels. That's a lot of oil to find a home for,” he said. “The market needs to be brought back into balance. Saudi needs to cut production and the US needs to slow down.”

Lower prices will also slow US drillers and spur the global economy.

Raymond James research suggests that 2014 oil prices will be as much as 15% below consensus, with $83 WTI and $95 Brent. In 2015, WTI prices fall to $70 and Brent to $85.

“If we were in a normal economic environment where oil demand was growing at 1.2 to 1.5 million barrels a day, which is what we saw last decade before the economic meltdown, this probably wouldn't be a big deal,” he said.

However, global demand is growing about half as fast as supply, at 700,000 to 900,000 barrels of oil per day.

And domestically, the bottleneck at Cushing may have solved one problem and created another. The added take-away capacity from the Midcontinent to the Gulf Coast may result in a bottleneck there.

With producers enjoying Louisiana Light Sweet crude prices, “that may be about to change,” he said.

Rollyson is more upbeat on natural gas, though he doesn't expect the price to increase much.

Coal-to-gas switching helped to prop up gas in 2012. However, coal's market share went from a low of about 32% last spring to 40% this year. That's the bad news if you're a gas producer.

“The good news is that over the next five years [coal-fired generation] is going to probably work its way back to the low-30% range or high-20% range because of regulation,” he said. And petrochemical, fertilizer and service companies will continue to benefit. “Lower oil prices are bullish for gas,” he said.

—Darren Barbee

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