Category Archives: Oil & Gas Pricing

Potential Oversupply and Slower Demand: Will OPEC Extend Production Cuts?

There is one thing on the mind of many folks involved in the oil and gas industry – the upcoming OPEC meeting in Vienna.  On June 25, 2019, the 176th OPEC meeting will be held.

In fact, there are already reports out there attempting to predict the potential impacts of the upcoming OPEC meeting and other global factors on the price of oil – check out this recent article from Bloomberg entitled, Bulls Beware: The 2020 Oil Market is Quickly Turning Ugly.

While oil prices have increased slightly today, they are still lower than many would like to see.  As of this post, WTI Crude is at $52.25 per barrel and Brent Crude is at $61.36 per barrel, according to Bloomberg Energy.  Of significant impact on oil prices is the fundamental nature of supply and demand – stockpiles are reportedly high (ish) and demand is currently low (ish), and may be going lower. 

Oil & Gas 360 released an article entitled, Goldman Sees Hard Path to OPEC+ Extension that discusses these supply and demand issues in the context of the upcoming OPEC meeting in detail.  The bottom line is that we may be going into the OPEC meeting with many uncertainties as to whether production cuts will be extended.  According to the Oil & Gas 360 article, stockpiles are currently at their highest level since mid-2017 and this oversupply is present “amid slower demand growth.”

According to the U.S. Energy Information Administration (“EIA”) Short-Term Energy Outlook which was released June 11, 2019:

Annual U.S. crude oil production reached a record 11.0 million b/d in 2018. EIA forecasts that U.S. production will increase by 1.4 million b/d in 2019 and by 0.9 million b/d in 2020, with 2020 production averaging 13.3 million b/d. Despite EIA’s expectation for slowing growth, the 2019 forecast would be the second-largest annual growth on record (following 1.6 million b/d in 2018), and the 2020 forecast would be the fifth-largest growth on record.

The takeaway from this is easily summed up by a recent CNBC article entitled, Oil Steadies as OPEC Supply Cuts Counter Growth Concerns as follows:  “While the talk of prolonged supply restraint is supporting prices, concern about slowing demand and economic growth has had a bigger impact on sentiment.”

Are we oversupplied?  Is there too much oil in inventories? How much will global oil demand drop?

We must wait and see…stay tuned!

Another Oil Glut Feared?

The headlines are all talking about supply and demand; specifically, oil supply and its impact on the price of oil.  As of the posting of this, WTI Crude is sitting at $58.07 per barrel and Brent crude is at $67.85 per barrel, according to Bloomberg Energy, and it has folks wondering where oil prices will go from here in light of oil inventories rising.  In fact, Oil & Gas 360 just released an article yesterday entitled, Rough Day for Oil: Crude Plunge Approaches 6% discussing the plunge in oil prices in detail.

The recent headlines include:

By way of a reminder, at the end of last year, a “glut” is reported to have helped contribute to the fact that oil prices took a significant tumble to that $45 per barrel mark, that we all would like to forget happened. 

So is another “glut” on the horizon? 

Let’s focus on North Dakota for now:

The North Dakota Industrial Commission (“NDIC”) released its most recent Director’s Cut on May 15, 2019, which can be found here.  North Dakota oil production reportedly bounced up approximately 54,500 barrels of oil per day from February 2019 to March 2019.  In addition, the number of producing wells reportedly increased by nearly 200 wells from February 2019 to March 2019, edging close to the all-time high number of producing wells which was 15,409 in January 2019.

However, the North Dakota rig count is reportedly down 70% from the high; the rig count as of May 15, 2019 was 65 and the all-time rig count was 218 from 5/29/2012.  The Director’s Cut also reports that drilling permit activity has returned to normal, operators continue to maintain a permit inventory that will accommodate varying oil prices for the next 12 months.

Now let’s look at big picture data:

According to the U.S. Energy Information Administration (“EIA”), crude oil inventories have risen – according to EIA data highlights, which can be found here, crude oil inventories as of May 17, 2019 are at 476.8 million barrels, an increase of 4.7 million barrels from a week earlier, and an increase of 38.6 million barrels from one year earlier. This increase was reportedly larger than expected, according to the article entitled, WTI Extends Slide to Weekly Lows Near $61 After EIA Report.

It is no secret that supply has increased, so the question remains as to whether supply has increased to the extent that it will cause a glut.  The upcoming OPEC meeting in June and many other factors may help us in determining where we sit on the supply front. Stay tuned!  

Up a Bit, Down a Bit: The Pricing Rollercoaster

Watching commodity pricing is a bit like watching a rollercoaster – it goes up one minute, down the next, then up again and down.  Today’s oil prices are no different.  We started the day up a bit, and this afternoon we are down a bit – the rollercoaster continues.  If you were looking for a lazy river-like pace, with its predictable turns and steady current, commodity pricing is not the ride for you.

This morning, Bloomberg Energy reports the following oil prices, which are up a bit from yesterday:

WTI Crude $4.06 per barrel, a +0.75% change

Brent Crude $1.36 per barrel, a +.075% change

A CNBC headline reads, “A ‘forecasting nightmare’: Volatile Oil Prices are Virtually Impossible to Predict, Analysts Say.”  In short, prices are on a rollercoaster and folks are having difficulty predicting where exactly on the ride we sit – are we on the upswing or should we brace for decline?

A number of things have contributed to pricing’s rollercoaster effect, including:

  • Supply and DemandU.S. Inventories are High.  According to the U.S. Energy Information Administration’s (“EIA”) Monthly Crude and Natural Gas Production report released March 29, 2019, which can be found here, U.S. crude oil production is increasing.  In fact, according to the EIA’s Today in Energy from April 9, 2019 entitled, “U.S. Crude Oil Production Grew 17% in 2018, surpassing the previous record in 1970,” “[a]nnual U.S. crude oil production reached a record level of 10.96 million barrels per day in 2018.”
  • OPEC Production Cuts – Plus Global Issues.  According to CNN Business article entitled, “There’s Trouble in OPEC and Oil Prices are up 50%,” trouble in 3 OPEC nations, namely, Venezuela, Iran and Libya, have contributed to domestic oil price increases.   
  • Restraint and a More Cautious Approach.  According to CNN Business article entitled, “Wall Street Taught Oil Drillers Restraint. That Could Lift Oil Prices,” some of the price volatility could be related to the more cautious approach some companies are taking, with the hopes of keeping higher oil prices sustained.  The article also reports that the sense of restraint in the oil patch could lead to breaking the boom-bust cycle.

There are of course other factors that may come into play, including politics, pipeline constraints, whether OPEC continues supply cuts and global supply and demand impacts.

While it is difficult to predict where the rollercoaster is headed, yesterday’s CNBC article entitled, “Prepare for $80 oil this summer as ‘wounded bulls’ rise, RBC warns,” forecasts that “international oil prices will average $75 a barrel in 2019 and consumers may find themselves contending with bouts of $80 crude this summer, RBC Capital markets said.” One thing is for sure, we are along for the ride!

Crude Oil Prices: What Lies Ahead?

We are constantly trying to predict the future of oil prices – that is just the nature of the beast in this business.  So many things begin, and end, with the price of oil for us.  Luckily, the U.S. Energy Information Administration (“EIA”) is literally in the business of analyzing and predicting the future of oil prices.  Thank goodness, because there are so many factors that go in to predicting commodity pricing, this is not an easy feat!

The EIA’s Short-Term Energy Outlook (commonly known as “STEO”) was released on March 12, 2019 – the full report can be found here

Let’s focus on the EIA’s price forecasts in this most recent STEO:

  • Brent crude spot prices reportedly averaged $64 per barrel in February, which marks a $5 per barrel uptick since January
  • The EIA forecasts that Brent spot prices will average $63 per barrel in 2019 and $62 per barrel in 2020.

These forecasts are great news because they predict price stability, in general, through 2020

Moving on to the Crude Oil Markets Review featured in the STEO, which can be found here, the takeaways are as follows:

  • The STEO reports that the U.S. active oil rig count reached a 10-month low of 834 rigs as of March 8, suggesting the rate of U.S. crude oil production growth could slow
  • Yet, the EIA forecasts U.S. crude oil production will increase by 1.3 million b/d in 2019 and by 0.7 million b/d in 2020.

In addition, the STEO notes the potential for at least two wildcards – OPEC and U.S. production levels, as well as the pace of global oil demand growth.  The STEO forecasts that these factors “present considerable uncertainty to oil market balances and price expectations.”

“Based on the current forecast, however, the EIA expects global inventory builds and rising OPEC spare capacity will limit significant upward oil price pressures in 2019 and in 2020.”

OPEC spare capacity?  Remind me?

OPEC’s primary goal is managing oil supplies to achieve market stability.  In December of 2018, OPEC member countries agreed to production cuts through June of 2019.  According to MarketWatch’s article entitled, OPEC Looks to Cancel April Meeting as Oil-Producer Committee Reports Improved Output-Cut Compliance, as of February, compliance with the production cuts was at almost 90%.  Said another way, most OPEC member countries voluntarily complied with the agreed upon oil production cuts. 

While it is difficult to predict what lies ahead for oil prices, stay tuned – we will have our fingers on the pulse of oil prices.  Many factors influence oil prices and we will keep you apprised of new developments!

2018 Year in Review

This has been quite a year for the energy sector, not only producing states in the Rocky Mountain region, but for the United States as a whole.  As we start 2019, let’s first take a look back on 2018 – a year full of relative price stability leading toward an optimistic outlook overall for domestic energy production.  

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