Boston Energy Research: Oil Price Outlook Unchanged

Boston Energy Research: Oil Price Outlook Unchanged
The outlook for oil prices has not changed much in recent weeks.

This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.

The outlook for oil prices has not changed much in recent weeks. They are likely to remain relatively flat well into 2018. While surplus oil inventories have declined significantly since the OPEC production cut, a large surplus to the five-year average will likely remain the rest of the year without a geopolitical event which disrupts supply. A significant increase in inventories is even likely in 1Q18 with the seasonal decline in global demand. But in 2020 and beyond, the risk of an oil shortage remains high.

WTI is expected to remain near $50/bbl well into 2018 before increasing in 2H18 with the seasonal ramp up in demand. It is expected to average of $50/bbl in 2017 and $53/bbl in 2018.

Brent is $55/bbl. Through August, the 2017 Brent premium over WTI averaged $2.01/bbl, but it widened dramatically in the aftermath of Hurricane Harvey. Gulf Coast refinery outages backed up crude supplies at Cushing OK, the NYMEX pricing point for WTI. The impact of Harvey on demand was negligible. At its peak, industry reports showed it briefly disrupted 9 percent of U.S. crude production and 26 percent of U.S. refining capacity.

Inventory rebalancing is underway, but at a much slower pace than originally anticipated. Since implementation January 1, OECD crude and product inventories are down 53 million barrels relative to the five-year average but were still 155 million barrels larger. When it announced its cut, OPEC believed elimination of the surplus to the five-year average would increase oil prices to $60-65/bbl.

US Production Growth Will Keep Surplus Inventories High

Assuming OPEC sustains its current levels of production, latest data indicates growth in U.S. production will likely meet substantially all of the growth in global demand well into 2018. After a large Q/Q increase of 360 thousand barrels per day (Mbpd) in 2Q17, current drilling trends indicate U.S. liquids will increase 230 Mbpd in 3Q17, and a large 479 Mbpd in 4Q17. The 4Q increase is driven by strong growth in the Permian Basin, new production in the Gulf of Mexico, and a seasonal increase in Alaska. Sequential growth will continue with a 280 Mbpd increase indicated in 1Q18 and possibly 165 Mbpd more in 2Q18.

The growth in the U.S. oil directed rig count flattened in recent weeks which will slow the growth in U.S. land production in coming months. At 749, the latest U.S. oil rig count is down 19 rigs from its August peak of 768. After hitting bottom at 333 rigs in 2Q16, it reached 507 the end of December. It then increased 127 rigs in 1Q17 and 113 rigs more in 2Q17. After an 18 rig increase in July, it increased just 1 rig in August. The crude oil futures curve has flattened and the benefit from hedging is reduced.

Leading U.S. producers have adjusted their 2017 capital budgets to a $51/bbl WTI oil price, and, in their August earnings calls, they left their 2017 production guidance intact. They remain as bullish about their production growth as before.

Increased drilling efficiencies this year have been able to offset higher oil field costs which are up 5 to 15 percent in 2017. The current oil price required to breakeven in both the Permian Delaware and Midland sub basins and the Williston Basin is $33/bbl and $34/bbl in the Eagle Ford.

But in the long run, Pioneer Resources, a leading producer in the Midland basin, said in a recent presentation “$50 oil isn’t going to get it done” because it doesn’t generate enough cash flow and the industry has too much debt. “U.S. production may grow for 2-3 years and a few independents may grow, but we are in a $60 long term price environment.”

Non OPEC Production Outlook Flat Outside The US

Outside of the United States, other non-OPEC production is expected to remain relatively flat through 2018. It was 45 (million barrels per day) MMbpd in August and 45.1 MMbpd in 2016. In the Americas, moderate production growth in Canada and Brazil is offset by declining production in Mexico and Colombia. Ramp up by the supergiant Kashagan Field in Kazakhstan is largely offset by declining production in China. Russia produced 11 MMbpd in August, fully compliant with its agreement with OPEC to cut production. It produced 11.3 MMbpd in 2016. Outside of the United States and Canada, the global rig count is also relatively flat Y/Y.

OPEC Production Is Higher Than It Anticipated When It Announced Its Cut

Going forward, OPEC production will likely be somewhat volatile but remain near current levels for the foreseeable future. Its August production was 32.75 MMbpd, down 90 Mbpd from its 2017 high in July. It was 32.3 MMbpd in 1H17 and 32.64 MMbpd in 2016. OPEC estimates demand for its crude will average 32.67 MMbpd in 2017 and 32.83 MMbpd in 2018. There is no OPEC talk from credible sources of a further cut in its production, only the possibility of an extension past its March expiration date.

Compliance with its cut was 82 percent in August and 86 percent YTD. Iraq is the biggest cheater, consistently exceeding its quota. It produced 4.45 MMbpd in August; its quota is 4.35 MMbpd. It has ambitions of increasing its production to 5.0 MMbpd.

With a decline in domestic unrest and militant activity, combined production from Libya and Nigeria in August was 720 Mbpd larger than in 4Q16, when both were exempted from the OPEC cut.


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