As the price of WTI continues to hover in perilous territory below $50/b, most experts see US crude oil production growth rates trending lower this year, especially if prices get stuck around current levels.
A nail-biting selloff in crude prices is coming at a time when most upstream companies are mapping out their capital budgets for the new year.
From recent highs in the mid-$70s/b three months ago, oil has hovered in the mid-$40s/b for two weeks. NYMEX front-month crude futures settled Thursday just above $47/b.
While visibility on oil prices remains cloudy, crude watchers say knowing more about upstream activity and production plans for 2019 would at least bring the year’s picture into a bit better focus.
Generally, exploration-and production operators budgeted conservatively in the last few years, including 2018, even although some raised their budgets a small amount at midyear and later as WTI soared.
Since producers remained disciplined then, analysts believe they will continue holding the line if prices stay near $50/b.
But E&P operators have become cautious and might be tempted to delay setting a firm 2019 plan. Operators may be “slow to set budgets,” due to an “unprecedented” commodity decline, coupled with infrastructure constraints, Evercore ISI analyst James West said.
EXPECTING SHORT-TERM UNCERTAINTY IN H1 2019
“We expect industry to muddle through first-half 2019 from what we believe is short-term uncertainty and volatility for oil prices before a true global expansion takes hold in [the] second half” of the year, West said in a recent investor note.
The infrastructure constraints West alluded to are mainly in North America, and specifically in the Permian Basin of West Texas/New Mexico, which first began to be felt in the first-half 2018 and will persist until later this year.
That is when the first of about 2 million b/d of takeaway capacity will begin to come online and ease the wide differentials between oil prices in the basin and the Gulf Coast. Although these were in the $20s/b several months back, in recent days they have been about $10-$11/b.
The handful of E&P capital budgets released so far, ahead of the Q4 earnings season in late January and February when most upstream operators publish their spending plans for the new year, signals capital spending flat to down.
Even when spending is not the main issue, there have been other pullbacks. For instance, small but aggressive operator Centennial Resources Development has dropped its 2020 oil production target of 65,000 b/d — 80% more than it produced in the third quarter — because of lower oil prices.
Oil’s volatility has created guesswork for analysts, who have relied on E&P companies’ public statements to form a picture of what 2019 production might look like.
“We’re now at the minimum oil price [needed] to think about any kind of growth” beyond that, Sami Yahya, an S&P Global Platts Analytics analyst, said. “While we won’t see capital budgets for smaller operators until January and February, I’d bet a lot of them right now are having difficulty” setting capex because crude prices are falling.
2019 OIL OUTPUT GROWTH SLOWS
According to Platts’ forecasts, US oil production for 2018 is expected at 10.8 million b/d, up by about 1.4 million b/d or 15% year on year. But this year, Platts sees growth slowing to 9% or 1 million b/d, for an average of 11.8 million b/d.
The Permian Basin, the US’ largest oil and gas play, was forecast to produce an average 3.35 million b/d in 2018, Platts figures show, up 880,000 b/d, or 36%, from 2017. But that growth should slow this year to 3.99 million b/d, up 664,000 b/d or 20%.
Many Permian wells drilled this year have been stockpiled owing to limited takeaway, and will be produced at a later date.
For all the oil price gloom at year-end 2018, the year had started remarkably well.
On the last trading day of 2017, WTI hit $60/b for the first time in two and a half years. As 2018 dawned, operators seemed giddy over high oil prices. For years they had grappled with a high cost of shale production that, in 2014, was in some cases upward of $50/b.
Three years later, operators had become so efficient that oil breakevens were in the mid-$30/b for the top US plays. Consequently, most E&P operators felt they were in good shape last year.
Disciplined from three years of oil prices that had averaged around $50/b in 2015-2017, they were still basing capital budgets on oil prices at $50-$55/b. In early 2018, it seemed as if that might change since oil appeared stabilized at a higher price than it had been in years.
But with crude now at 2017 levels, the new year “feels a little different to us,” investment bank Jefferies wrote in a Wednesday investor note.
“The future doesn’t feel as certain and optimistic, and the path forward does not seem as clear,” the bank said. “The markets are extremely volatile and virtually impossible to anticipate … but unlike other turbulent periods, the reasons why are not obvious.”
Source: PlattsPrevious Next