David Blackmon
Well, that all escalated – or rather, de-escalated – quickly, huh? During the course of a six-day vacation around Christmas, the WTI price for crude dropped from $50/bbl down to $42/bbl. That takes a situation on oil prices that was already troubling for most domestic producers into the potentially-calamitous range for companies saddled with heavy debt loads and high lifting costs.
This latest collapse in crude prices comes on the heels of a longer-term drop that lasted throughout October and November. From October 2 through November 30, WTI fell from $76.41/bbl to $50.93, a decline of about 33%, as it became obvious to traders and investors that the market had become significantly over-supplied despite the re-implementation of U.S. sanctions on Iran by the Trump Administration.
This overall 45% drop in the domestic benchmark price for crude took place during the same period when producers were setting their capital drilling budgets for 2019. While one might think that reality would cause a significant curtailment of drilling activity during the first half of 2019, consider that only about a third of that price drop had come about by November 1, by which time most of these companies were finalizing those budgets. With WTI sitting at $63/bbl at that time, few were anticipating a further drop of this magnitude by the end of December.
Here’s the thing: Thousands of domestic drilling projects that are economic to drill at $63/bbl are uneconomic to drill at $42/bbl. So right now we are already beginning to see reports that some companies are going back and reconsidering some budgeting decisions that were made just a month ago. Others are likely still in wait-and-see mode as they try to assess whether the December price drop is a temporary result of panic-selling or a more long-term phenomenon related to a weakening global economy.
Given all of this, my first prediction is that we will see a gradual fall in the domestic U.S. rig count throughout the first half of 2019. Indeed, the DrillingInfo Daily Rig Count already fell by about 3% during December, from 1160 to 1120 on December 25. I’m betting that, by June 30, that measure will be below 1050 because…
…my second prediction is that the price for WTI will rise again, but will not exceed $60 during the first half of 2019. Even with a gradual slowing of U.S. drilling and completion activity, overall domestic production will continue to rise rapidly as technology and efficiency gains enable upstream companies to wring higher and higher volumes out of each well over time. Global demand – which is still rising despite a reported economic slowdown – will combine with U.S. production increases to largely offset the 1.2 million bopd reduction in exports promised in early December by the OPEC+ nations.
That all leads to my third prediction, which is that the domestic oil and gas industry will continue to set new all-time production records in each of the first six months of 2019. The lack of any governmental mechanism to force producers to slow down for their own good, the anti-trust laws that prevent them from banding together to do so voluntarily, and the pressures to achieve short-term production goals to satisfy investors all combine to ensure that most companies will keep drilling and completing uneconomic wells in the near term as they hope for some magic solution to the low price environment in which they now find themselves.
Half of the drilling will continue take place in Texas, where my fourth prediction is a no-brainer: The current pipeline capacity bottleneck coming out of the Permian Basin will be resolved by the third quarter of 2019. By the end of 2020, the region will enjoy a significant surplus of pipeline capacity.
Here’s another no-brainer: My fifth prediction is that natural gas prices, after a brief run-up over $4.50/mmbtu in November, will fall back down below $3.00/mmbtu early in 2019 and stay there. I include this one only so that I can be assured of getting at least one prediction right.
Though natural gas remains too abundant in the U.S. to support higher prices for any long period of time, positive signs do exist. My sixth prediction is that ongoing U.S. economic growth of between 2% and 3% will continue to support major investments in new capital spending by industries which use natural gas and its constituent liquids in their processes throughout 2019, and LNG exports will expand throughout the year as several additional export facilities come online.
In fact, U.S. exports of both LNG and crude oil will set new records during the first half of 2019, as ports along the Texas and Louisiana Gulf Coasts continue to find innovative solutions to meet the relentless demands from producers to send higher volumes of U.S. production abroad. That’s my seventh prediction.
My eighth and final prediction is that I will be back in this space in June of 2019, highly embarrassed about several of the predictions made in this piece. Because the one thing we know for sure about the oil and natural gas industry is that it is pretty much impossible to accurately predict.
Source: Forbes
