Category Archives: Oil & Gas Pricing

The May STEO Forecasts Good News on Predicted Pricing, But Concerning Predictions on Production

The U.S. Energy Information Administration (“EIA”) released its Short-Term Energy Outlook (“STEO”) on May 12, 2020, but noted that it was subject to “heightened levels of uncertainty because the effects on energy markets of mitigation efforts related to the 2019 novel coronavirus disease (COVID-19) are still evolving.”

The May STEO elaborated on the extent of this uncertainty as follows: “Reduced economic activity related to the COVID-19 pandemic has caused significant changes in energy supply and demand patterns. Crude oil prices, in particular, have fallen significantly since the beginning of 2020, largely driven by reduced oil demand because of COVID-19 mitigation efforts. Despite the April agreement between the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) to reduce production levels beyond the end of the STEO forecast period, crude oil prices have remained at some of their lowest levels in more than 20 years. Uncertainties persist across EIA’s outlook for other energy sources, including natural gas, electricity, coal, and renewables.”

Aside from uncertainty, what are the takeaways from the May STEO

The good news is that there are some positives:

  • Brent Crude Prices – Better than we Thought?  Prices are predicted to get better than we thought.  According to the May STEO, the EIA forecasts that Brent crude oil prices will average $34/b in 2020, which is down from an average of $64/b in 2019 but better than I think many folks were thinking. The EIA further forecasts that Brent prices will rise to an average of $48/b in 2021, $2/b higher than forecast last month, as EIA expects that declining global oil inventories next year will put upward pressure on oil prices.
  • Natural Gas Prices – On the Rise?  The EIA is also forecasting that natural gas prices will generally rise through the rest of 2020 as U.S. production declines and that Henry Hub natural gas spot prices will average $2.14/MMBtu in 2020 and then increase in 2021, reaching an annual average of $2.89/MMBtu.  The EIA reportedly expects prices to rise largely because of lower natural gas production compared with 2020.

There are some not-so-great aspects of the May STEO as well:

  • Gas and Jet Fuel Consumption – Significantly Down:  According to the May STEO, for all of 2020, the EIA forecasts that U.S. motor gasoline consumption will average 8.3 million b/d, a decrease of 11% compared with 2019, while jet fuel and distillate fuel oil consumption will fall by 25% and 10%, respectively, during the same period.
  • Domestic Crude Oil Production –  The EIA forecasts U.S. crude oil production will average 11.7 million b/d in 2020, down 0.5 million b/d from 2019. In 2021, EIA expects U.S. crude oil production to decline further by 0.8 million b/d.

Despite the positive news about pricing, the forecasts on oil production are significant.  According to the May STEO:

If realized, the 2020 production decline would mark the first annual decline since 2016. U.S. crude oil production has not declined for two years in a row since the 17-year period of declines beginning in 1992 and running through 2008. Typically, price changes affect production after about a six-month lag. However, current market conditions will likely reduce this lag as many producers have already announced plans to reduce capital spending and drilling levels.

It is difficult to predict what oil production will look like in the future, especially given all of the uncertainty.  Many factors, including unknown factors such as specific impacts of COVID-19 on the industry, will come into play.  Stay tuned!

Tell Me Somethin’ Good

According to Oil & Gas 360’s article originally from CNBC entitled, Oil prices may now be at a bottom after historic OPEC deal, US energy secretary says, “[o]il prices are down more than 55% year-to-date, having experienced the worst price plunges in nearly two decades in the face of record supply, disappearing storage space and global demand eviscerated by coronavirus lockdowns around the world.”

I don’t know about you, but I could use some good news in the energy sector right now.  I would take any good news right now, actually.  Enter today’s blog – Tell me Somethin’ Good.

Here is some good news from the energy sector, from electricity to mining, and oil and gas – there is a lot of good happening out there that we can focus on:

Here is my favorite news article – trust me, it is worth the read:

Even though the energy sector has been hit hard by the coronavirus, it is doing amazing things to help others.  Try not to get too bogged down by the bad news, troubling statistics and overall anxiety-inducing situation – focus on the good!  

Crude Oil Prices and Prices at the Pump

This morning, I noticed that the price of gasoline at the pump was $1.77 per gallon.  To put that in perspective, when I first started driving, I remember the price being around $2.02 per gallon…

How does the price of crude oil correlate to the price of gasoline at the pump?

Good question!  As of the publication of this blog, according to Bloomberg Energy, the price of WTI Crude is $26.10 per barrel and Brent Crude is $33.63 per barrel.  There is clearly a correlation between the price at the pump and the price of a barrel of crude oil.

Crude oil is the main component making up gasoline, so the price of a barrel of crude oil truly does account for a substantial part of the price of gasoline. 

However, in addition to refinery costs, etc., there are other factors that come into play when looking at the price of gasoline at the pump.

The other main factor to consider when looking at the price at the pump, and the price of crude oil as well, is demand.  Recent headlines have been addressing lower gasoline demand: 

According to Bloomberg’s article entitled, Staggering Loss of Oil Demand Raises Pressure on OPEC+ to Cut Output:

“The most shocking drop in U.S. consumption was concentrated on gasoline, long the fuel that powered the American way of life. The Energy Information Administration said a proxy for gasoline demand fell to 5.06 million barrels a day, the lowest since weekly data is available starting in 1990. Separate monthly data suggests the U.S. may have not consumed so little gasoline anytime since 1969, the year of the moon landings.”

A critical factor in both crude oil prices and the price of gasoline is supply.  The big discussion concerning supply recently has focused on the global crude oil supply.  As we all know, that is where The Organization of Petroleum Exporting Countries (“OPEC”) has historically come into play.  OPEC is reportedly set to meet virtually this week actually, on April 9, 2020.

Hand in hand with supply issues come storage issues.  In fact, storage issues that we did not think possible may be on the horizon.  According to a recent article in S&P Global entitled, No place to go: Oil storage filling up amid collapsing demand, excess production, “Concerns are mounting that the U.S. soon may not have enough oil storage to absorb a collapse in demand caused by the coronavirus that has started to ripple through the supply chain, with consequences for producers, pipelines, refiners and consumers.” 

Therefore, while consumers may be happy about the low price of gasoline at the pump, we cannot lose sight of the other factors contributing to that low cost and the potential consequences of the same.  Stay tuned…

U.S. DOE to Purchase Crude from Small to Midsize Producers

In the wake of crude oil price’s recent plunge, the United States Department of Energy (“DOE”) has announced that it will fill the Strategic Petroleum Reserve (“SPR”) to its maximum capacity by purchasing 77 million barrels of American-made crude oil.  The DOE’s announcement can be found here.  

The initial solicitation is for the purchase of 30 million barrels by confidential Request for Proposal (“RFP”) and can be found at: https://www.spr.doe.gov/doeec/OilPurchase.htm. The focus of this initial crude oil RFP is small to midsize domestic oil producers – throwing a lifeline to those who have been hit especially hard by the price drop. 

According to the DOE’s announcement, “the [DOE] is working with Congress to finalize the funding to support the purchase of the full 77 million barrels of oil, consistent with the President’s directive.”  With regard to delivery, the announcement recognizes that the private sector needs time to plan for delivery logistics, so the solicitation is for crude oil to be delivered in May and June; although, early April deliveries are encouraged.

The purchase is sure to be controversial – as discussed in an article in The Hill entitled, “Trump administration prepares to buy 30M barrels of oil amid industry slump.”  However, the reality of the far-reaching benefits of the oil purchase cannot be overlooked, as oil and gas industry employees impact so many other service sectors in the nation.  Further, targeting small and midsize producers for the initial RFP will provide crucial relief for these companies who are the lifeblood of the oil and gas industry, but who may not have the financial wherewithal to weather oil prices below $30 per barrel for long.

What is Going on With OPEC??

There have been many changes recently, but one of the changes on the forefront of my mind has been “what is going on with OPEC”?  It feels like a major shift has happened with The Organization of the Petroleum Exporting Countries (“OPEC”).

Background

By way of a short reminder, OPEC has been around since 1960 – in fact, this year marks the 60th year since its founding.  Its mission is:

“to coordinate and unify the petroleum policies of its Member Countries and to ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”

There are 13 member countries including Saudi Arabia. 

Current Status

According to the Investopedia article entitled, OPEC vs the U.S.: Who Controls Oil Prices, “OPEC controls oil prices through its pricing-over-volume strategy.” 

Now, there is a big question mark behind that sentence.  OPEC allegedly controls oil prices, but we all know that many other factors impact the equation as well, including global politics, supply and demand and technology. 

Stability has historically been the primary goal of OPEC, but recent events have turned oil prices and supply on their heads.  The recent headlines indicate that a shift has happened in OPEC:

What does this mean for OPEC?  Has OPEC lost its grip and with it, its purpose and utility?  Only time will tell.

It’s a Wrap: New Outlooks for 2020

Many of us have the end of the year and the end of the decade on our minds: wrapping up projects, working to close deals and matters, and striving to end the year on as high of a note as we possibly can.  It is hard to believe but there are only 15 days left in 2019.

With the end of the year at the forefront, it puts many things into perspective.  The U.S. Energy Information Administration (“EIA”) recently released its December 2019 Short-Term Energy Outlook (“STEO”) which can be found here.  With 2019 coming to a close, we look to forecasting 2020. 

STEO Forecast Highlights – By way of a summary, here are the highlights of the December 2019 STEO:

  • Slower Increase in Oil Production:  The EIA is expecting slowing crude oil production growth in 2020, but growth in U.S. crude oil production is expected to increase over 2019 production.  The EIA is predicting the following: “Slowing crude oil production growth results from a decline in drilling rigs over the past year that EIA expects to continue into 2020. Despite the decline in rigs, EIA forecasts production will continue to grow as rig efficiency and well-level productivity rises, offsetting the decline in the number of rigs.”
  • Lower Oil Prices:  The EIA is expecting that “crude prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of the year.”
  • Continuing OPEC Production Limits:  The “EIA assumes that OPEC will limit production through all of 2020. . . .”  The new production target is reportedly “1.7 million barrels per day (b/d) lower than in October 2018, compared with the former target reduction of 1.2 million b/d.”
    • By way of a reminder, the Organization of the Petroleum Exporting Countries (“OPEC”) met last week and approved additional adjustments to the previous production cuts – more on this can be found here.
  • Increase in Crude Oil and Petroleum Exports:  The “EIA expects total crude oil and petroleum net exports to average 570,000 b/d in 2020 compared with average net imports of 490,000 b/d in 2019.”

These new outlooks for 2020 leave us with a hopeful anticipation overall as we close out the year.  Only time will tell if they are accurate forecasts!

Oil and Gas Bankruptcies: More Added to the List

Last month, we discussed the increase in oil and gas bankruptcy filings since May of 2019 – the full blog post can be found here.  Haynes and Boone, LLP released a new Oil Patch Bankruptcy Monitor as of September 30, 2019, which can be found here, showing that even more have been added to the list.

Since our last post on the subject, which reflected the August 2019 data, seven more companies have filed for bankruptcy in the last month or so, according to the September Oil Patch Bankruptcy Monitor.

In addition to the fact that seven more companies have been added to the list, the map of 2015-2019 E&P Bankruptcy Filings By Location found in the September Oil Patch Bankruptcy Monitor is similarly concerning; Texas is reportedly leading the charge with 89 filings, followed by Delaware with 31 filings, Canada with 18 filings, and Colorado and Louisiana with 11 filings each.

The September Oil Patch Bankruptcy Monitor also shows that the third quarter of 2019 has been the highest quarter of cumulative North American E&P Bankruptcy Filings since 2015…the upward trend of this graphical depiction is startling.  As of the publication of this blog, according to Bloomberg Energy, WTI Crude is at $54.01 per barrel and Brent Crude is at $59.92 per barrel, which is a general decline from this time last month.  As always, it is difficult to try to discern what this means. 

Stay tuned and we will keep you posted on oil and gas industry insights in light of the recent increase in bankruptcies.

Oil and Gas Bankruptcies Rising

Headlines lately are shedding light on a frightening trend – oil and gas bankruptcies are on the rise:

According to Haynes and Boone, LLP’s August 2019 Oil Patch Bankruptcy Monitor, there has been an increase in the number of oil and gas bankruptcy filings, especially since May of 2019 – 26 exploration and production (E&P) firms have reportedly filed for bankruptcy through mid-August this year, with debts reportedly totaling $10.96 billion.

A number of factors are contributing to the increase in oil and gas bankruptcies – oil price is chief among them.  Further, according to the Oil & Gas 360 article, one of the reasons behind the bankruptcies is, “a displeased Wall Street cutting off the access to capital for most companies.”  

Many are waiting with bated breath to receive updated data on the number of bankruptcies – as of the date of the August Oil Patch Bankruptcy Monitor, there had already been 4 bankruptcies in the month of August, according to the report’s 2019 bankruptcy list.

While not an issue isolated to the Rocky Mountain region but impacting all producing states, many in Colorado are concerned that the recent legislation in the state may become yet another contributing factor to increasing bankruptcies in the energy sector.

Will oil and gas bankruptcies continue to rise for the rest of the third and fourth quarter?  Will Colorado be next to see a wave of bankruptcies?  Only time will tell…

From the Kitchen Recipe Box: Sometimes You Need to Spice it Up

Last night, I made salmon patties.  We have this amazing canned Alaskan wild salmon and it makes some extremely delicious salmon patties, let me tell you.  As I was making them last night, one thought kept crossing my mind: I was not in the mood for a basic, plain, old salmon patty.  You know what a regular salmon patty is?  It is boring, that’s what.

You know what else can feel a little monotonous?  Reviewing energy statistics!  The U.S. Energy Information Administration (“EIA”) released its Monthly Energy Review, which can be found hereAs interesting as this data is, it can still taste a little bland.

Sometimes you need to spice it up!  In salmon patties and in reviewing data, a little flavor goes a long way.

I added a little Siracha to my salmon patties last night, whipped up a Siracha aioli sauce, diced up scallions and celery to add in to my patties and also topped them with dill and sea salt.  Just like that, the flavor profile was no longer boring.  It was totally new and exciting! 

To add a little spice to reviewing energy statistics, one must change the flavor profile by looking at the data with fresh eyes

The EIA’s Monthly Energy Review may look like just a bunch of charts and graphs, but a close review reveals patterns and trends.  I specifically like to look at production, consumption and energy prices.

For example, in the Crude Oil Price Summary, which can be found here, a comparison of the yearly average prices tends to show an overall upward trend. 

On a more micro-level, oil prices today are also moving upward. According to Bloomberg Energy,  WTI Crude Oil is at $55.95 per barrel at the time of the posting of this blog and Brent Crude is at $60.61 per barrel. Both of these prices are on the rise!

What is the spice to add when thinking about energy prices?  Projections and forecasts, of course.  Both of these considerations add the flavor.   

According to the EIA’s Short Term Energy Outlook (“STEO”) released earlier this month:

  • EIA forecasts Brent spot prices will average $64/b in the second half of 2019 and $65/b in 2020. The forecast of stable crude oil prices is the result of EIA’s expectations of a relatively balanced global oil market. 
  • This spice is clearly forecasting that Brent is on the rise from where we sit today.
  • EIA expects WTI crude oil prices will average $5.50/b less than Brent prices during the fourth quarter of 2019 and in 2020, narrowing from the $6.60/b spread during July. The narrowing spread reflects EIA’s assumption that crude oil pipeline transportation constraints from the Permian Basin to refineries and export terminals on the U.S. Gulf Coast will ease in the coming months. In the July STEO, EIA forecast the Brent-WTI spread to average $4.00/b in 2020. 
  • This spice forecasts that WTI will also raise and the spread will start to shrink up even more.

Thus, the flavor profile on oil prices is starting to heat up and is projected to get spicier.

TAKEAWAY:  Don’t be afraid to spice things up or look at things with fresh eyes to see a new flavor profile!

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!