February 11, 2018
Scott Linn Tackles Common Questions in the Industry This Year:
Energy markets are dynamic and subject to numerous influences impacting the behavior of production, demand, and consequently, prices. Listed below are some questions on the minds of industry experts as we begin 2018, along with some evaluations for the upcoming year from Scott Linn, research director of the Energy Institute at the OU Price College of Business.
Reduced Global Inventories, Demand and Supply
Question: Will OPEC’s plan to reduce global inventories succeed and push prices above $70? What will OPEC’s strategy be for its exit from the OPEC/NOPEC Declaration of Cooperation?
Outlook: The Organization of the Petroleum Exporting Countries (OPEC) is sticking to its plan to cut global commercial oil inventories down to the five-year average. As of December 21 of last year, Reuters reported that plans are under development and “it’s a continuity strategy, rather than an exit,” as one of the OPEC sources said.
If OPEC maintains the plan, demand increases at a rate comparable to 2017 and the production reductions by Venezuela continue, the Brent price could average $60 - $61 in 2018. (Which is consistent with predictions by Barclay’s and the U.S. Energy Information Administration [EIA]).
The Federal Reserve Bank of New York concludes that demand-side factors are playing a more dominant role in the current price rise. Longer term, oil demand estimates produced by the leading organizations (PIRA, EIA, IEA, BP, IHS) all suggest that demand will continue to increase until at least 2040. Although some forecasts predict demand to stay high it will increase at a declining rate.
In a recent review, Spencer Dale, group chief economist for BP PLC and Bassam Fattouh, director of The Oxford Institute for Energy Studies also noted: “Inherent advantages of oil as an energy source, particularly its energy density when used in the transport sector, mean that the eventual peaking in oil demand is not expected to trigger a significant discontinuity or sharp fall in demand.”
But What About The Growth of U.S. Shale Production?
Question: With Brent prices now above $65 and WTI prices near $65, along with shale production expected to grow during 2018, how fast will U.S. shale drilling and production accelerate countering the objective of lowering stocks? Especially with the growing inventory of drilled, but uncompleted wells.
Outlook: Barclays suggests production will increase at a rate of 20 percent in 2018 with a 10 percent growth in capital spending. Estimates of breakeven oil prices for new wells all fall below $60 based on research at the Federal Reserve Bank of Dallas.
The U.S. EIA also predicts that U.S. crude oil production will average 10.3 million barrels per day (B/D) in 2018, “which would mark the highest annual average production in U.S. history.” This could offset the OPEC production plan, which many expect will continue through 2019, with potential adjustments in the caps and pushing prices down from current levels. Barclay’s recent prediction is for the Brent price to average $60 for 2018, the same as the current prediction of the EIA.
Increasing Demand for Liquefied Natural Gas (LNG)
Question: Will the Henry Hub natural gas futures price become the global benchmark for natural gas in light of the international growth in demand for LNG?
Outlook: “The economics suggest that U.S. gas prices will act as a natural anchor,” said Spencer Dale, chief economist at BP PLC, in the Wall Street Journal. This is supported by the observation that LNG sale and purchase agreements are increasingly indexed to the Henry Hub price in contrast to prices indexed to oil. For instance, on January 16 this year, Cheniere Energy, Inc. announced that its subsidiary Cheniere Marketing, LLC had entered into an LNG sale and purchase agreement with Trafigura Pte Ltd. This agreement is for 1 million tons of LNG per annum, where the purchase price for LNG is indexed to the monthly Henry Hub price, plus a fee. However, the Title Transfer Facility (Holland) hub prices play a continuing role, especially for the Asian LNG market.
Uncertain Future for U.S. Power Grid
Question: What does the future hold for the U.S. power grid?
Outlook: ENERKNOL Research points out that grid operators must increasingly manage a higher share of renewable generation, accommodate state policy requirements with wholesale markets and enhance price formation to improve market signals. This, coupled with the announcement that the American Society of Civil Engineers gave the entire energy infrastructure a barely passing grade of D+, and with advances in electricity pricing moving from Time-of-Use pricing to a form of dynamic pricing system such as Oklahoma Gas & Electric’s Smart Hours program, and the future of this sector appears challenging.
Want to discuss the future of the energy industry further? Register for the Price College of Business Energy Institute’s Sixth Annual Energy Symposium in Oklahoma City on March 15, 2018.
We would love to hear what you think! Tweet us (@OU_Energy) any additional questions or evaluations.