HOUSTON—In an industry mixed with bullish and bearish analysis at any price, it’s hard to reach a consensus on the exact oil price that drives growth. While some industry analysts have indicated that certain oil and gas companies might be better positioned at $50/bbl crude oil, J. Marshall Adkins, director of energy at Raymond James Financial (NYSE: RJF), argued at the recent Houston Producers’ Forum that such an environment reveals a realm of crises.

Based on his energy outlook model, Adkins told attendees that at $50, inventories fall and companies experience negative cash flow. “The argument that the world works at $50 is simply wrong,” he said.

Instead, he said with a bullish outlook for year-end 2018, the world needs a long-term crude oil price of $65/bbl for the market to be balanced.

In 2017, Goldman Sachs Group Inc. (NYSE: GS) reported that oil majors like BP Plc (NYSE: BP) and Royal Dutch Shell Plc (NYSE: RDS.A) were better positioned at $50/bbl. Goldman Sachs added that the oil majors were even able to adapt in the lower-for-longer environment to pull in more cash at $50/bbl for crude than at $100/bbl.

However, Raymond James reported that between 2016 and 2017, U.S. E&Ps experienced negative cash flow and were outspending by 25%. With an increase in cash flow, Adkins said there is a natural increase in spending. But, even in a $60 in environment he said it will be hard for E&Ps to “change their DNA” and return their focus to spending within cash flow.

For E&Ps to keep a balance between cash flow and capex, Adkins’ research indicates that the U.S. would need to come up with 1.5 million barrels per day (MMbbl/d) of liquids per year over the next decade.

“You can’t balance the system at a supply growth of a million a day or less in the U.S. [because] demand is going to grow a million, or more, and supply outside the U.S. will probably be falling,” Adkins said.

When running his model at $50, Adkins saw the market breakeven in 2016 and draw at 1.2 MMbbl/d in 2017. In 2018 and 2019—staying at $50/bbl—he said it would draw another 2 MMbbl/d.

“That can’t happen, we’d run out of crude,” he said. “You can’t stay at a $50 price.”

In his energy outlook model, U.S. crude production growth is very sensitive to rigs and oil price. To cater to that, he argued $65/bbl for crude is required to put the U.S. in the ideal situation to hit that mark.

Adkins said $65 crude would drive the U.S. rig count well over 1,100 and would allow E&Ps to afford to run them. In his projection with 1,100 rigs at $65/bbl, compared to only 800 at $50/bbl, the U.S. would easily hit 1.7 MMbbl/d.

“Given our belief that the rig count does move off and exit above 1,200 this year, I think we will put up phenomenal growth in the U.S.,” Adkins said.

According to his outlook model, an average WTI of $65/bbl in 2018 and 1,100 rigs would also significantly decrease the outspending level to an average of 22%.

Included in his 2018 outlook was inventory, which he said U.S. crude would be dangerously low in this year.

His outlook data puts the normal crude inventory level at about 490 MMbbl in March 2018. However, the model tracked the U.S. at about 420 MMbbl today, which Adkins said creates a problematic gap at the back end of 2018.

For inventory to increase, with oil supply and demand changes year-over-year, he said a $65 crude environment is needed.

“We’ll draw inventories down in 2018, but we are able to reverse that and see modest inventory growth in 2019,” he said. “I don’t think that’s enough to get back to normal…but at least $65 puts us on the path to rebalancing.”

Despite predicting the U.S. will experience a significant decrease in inventories, Adkins still has a very bullish outlook that U.S. crude inventory will catch up in the back half of 2018.

“Seasonally, inventory always builds in crude the first four months of the year,” he said. “So we’re still in that time period where inventories are still building.”

Adkins said it won’t be until 2020 when inventories will even out, but asserts $65 crude is the best place to start to begin rebalancing the market.

Mary Holcomb can be reached at mholcomb@hartenergy.com.