Oil Outlook Favors Higher Prices

on November 19, 2015 at 9:57 AM

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The Price Picture: The global oil market has seen a continued growth of production while demand has remained stagnant over past year, leading to a steady drop in prices over the past 15 months, aside from a short-lived upward tick in the second quarter of 2015. As prices have fallen from above $100/barrel in July 2014 to a recent plateau of $45 to $50/barrel, no one is certain when prices may rebound. Data collected as part of Black & Veatch’s 2015 Strategic Directions: Natural Gas Industry report indicate a bullish outlook for oil and natural gas prices.

Keys to Watch:  With oil prices expected to remain at current levels for the next few months, the next big round of announcements will be at the Organization of Petroleum Exporting Countries’ December 2015 meeting and the financial reporting in early 2016 by the major international integrated oil companies. Like last year, another round of deep cuts in exploration and production expenditures could quickly change the oil price trajectory over the next 12 to 18 months.

Another key factor to watch for will be how financial institutions re-examine their lines of credit to producers. Reserve-based lending is driven by the value of existing proved oil and gas reserves. As commodity prices have fallen, lines of credit may be reduced, forcing producers to either sell non-core assets or find new sources of capital to solve the short-term debt crunch.

EIA Forecast: The U.S. Energy Information Administration (EIA), in its Annual Energy Outlook 2015, shows average wellhead prices in its reference case reaching $86/barrel by 2020. In its high oil price scenario, average wellhead prices reach $164/barrel and in a low oil price scenario $62/barrel by 2020.

Key Drivers: The current economic outlook has dampened expectations for substantial growth in oil demand, so prices will be primarily driven by oil production levels in the near term. North American producers have slowed their drilling pace, but new incremental global supplies like Iran may have an even greater impact on oil prices today.

OPEC spare production capacity is often used as a barometer of the global market conditions and the ability for it to place influence on oil prices.  In the third quarter of 2015, OPEC had 1.2 million barrels per day (b/d) of spare capacity, which is down from the same time last year at 2.04 million b/d. OPEC has operated at a high capacity factor despite lower oil prices, leaving many to speculate as to how long this could continue.

Current Forecast and Survey Findings: Black & Veatch currently expects U.S. benchmark West Texas Intermediate crude oil prices to slowly rise over the next four to five years, reaching approximately $75/barrel by 2020.  Respondents to the Strategic Directions report survey agree; 27.8% of respondents across all sectors of the natural gas industry believe that oil prices will be in the $71 to $80/barrel range by 2020. The greater majority of respondents believe that oil prices will be between $51 and $80/barrel, which is where the NYMEX forward curve for the 2020 contract months has settled over the past year.

Figure 1: Comparison of Oil Price Forecasts with Black & Veatch Natural Gas Strategic Directions Survey Results for 2020

Oil Price Forecasts

A limited number of survey respondents (6.8%) believe that prices would remain fairly flat over the next five years. Most respondents have begun to feel the impacts of the slowdown in drilling activity, and believe that market fundamentals will ultimately drive a rebound in prices. Nearly 15% of respondents said they did not know where prices would be.

Takeaways for Natural Gas Users: A rebound in oil prices could spur production of gas that has high liquids content, and the need to build gathering, processing and other midstream assets. The price drop over the last 15 months has slowed processing and interstate pipeline development, which many hope will turn around with a price rebound. Higher oil prices will help ease the credit crunch and debt servicing requirements, allowing producers to drill and produce more.

Published originally on Black & Veatch Solutions