You are not alone. All one needs do is watch the daily price volatility of oil futures trading on the NYMEX to appreciate how unsettled the view is about the commodity’s future. But is that the real story of where oil prices are likely headed during 2020 and for the balance of the decade? We doubt it.
It is fascinating to watch the daily oil price moves and listen to the commentary of commodity traders about what is making prices move up or down on any particular day. The reality is that most people in the industry, and most buyers of oil, are more concerned about the trend in prices and what that might mean for their pocketbooks. If you are a producer, you’d love to know what oil prices might be in three-, six- or twelve-months’ time. You then could decide to hedge based on the current pricing structure if you thought future prices would be lower. Just the reverse would be true if you expected prices to rise down the road.
Few consumers buy oil. They buy refined oil products—gasoline, diesel and home heating oil. While crude oil is the core cost component of the retail price, what it costs to transport and refine the oil into products, how much it costs to transport it to market, and finally, how much the refiner and distributor make, are all important components in setting the price for gasoline or diesel at the pump, or heating oil at the rack. We seldom think about all those other costs as we watch oil prices fluctuating. Up or down is either bad or good.
For the past three months, WTI futures have traded between $54 and $63 per barrel. The highs and lows have been influenced by the uncertainty surrounding all the questions above, as well as geopolitical events such as the Iranian attack on Saudi’s oil facilities and the killing of the top Iranian terrorist general. In each of the latter cases, oil prices spiked since either 5 million barrels of supply was being removed from the market (shortage) for an undetermined time, or the Middle East was on the precipice of war. No shortage developed, nor did awar break out—at least not yet.
For the foreseeable future, oil prices will likely continue to trade in a range of $55 to $65 a barrel. The world has plenty of oil— not all of it readily accessible, but most is available with time. Barring an economic collapse sapping demand, there is little on the horizon to move oil prices dramatically beyond the extremes of our range. For the industry, and consumers, determining what oil will sell for five years from now may be more important, as that will provide insight as to how our economy and society may be shaped. Futures prices provide only a clue, but not a lot of wisdom. As you watch the news, and especially technology trends and geopolitics, keep the question of oil’s price in 2025 in the back of your mind.
Natural Gas:
Natural gas prices have fallen below $2 per thousand cubic feet—a low last seen in 2016. Did they call off winter? That’s what gas traders and producers are wondering. Through the first 22 days of January, average temperatures in the United States are about 40 F warmer than the 10- year average and 30 F above last year’s temperatures. Although gas production is below the pre-winter high due to well freeze-offs and LNG exports are climbing toward 9 billion cubic feet per day, the lack of traditional winter heating demand is boosting seasonal storage and pushing down gas prices.
Estimates are that gas production is 3-4 bcf/d below the pre-winter output of 96-97 bcf/d, which would normally be pushing gas prices up, or at least supporting them at levels above $2/Mcf. Unless winter heating demand returns—and quickly—this winter will see the industry jamming lots of gas into storage or seeking other markets for sales.
As gas supply start rebounding in the March timeframe, there is greater regulatory pressure on producers to stop flaring surplus gas. The lack of pipeline takeaway capacity from the Permian, our largest source of gas flaring, is being remedied, so as the gas gathering infrastructure increases, more gas supply will be seeking commercial markets. Expectations are that reduced oil well drilling in the Permian this year will slow the growth in associated natural gas output, but an often overlooked consideration is that older fracked oil wells tend to become gassier in their output.
While gas prices are not likely to rebound materially this year, at least until we see if the summer will bring record hot temperatures, low gas prices will help U.S. LNG exporters compete for global markets. What we are learning is that the U.S. is well supplied with natural gas, something that will be good for consumer electricity and heating bills, petrochemical profit margins, and the health of our growing LNG industry. The risk we run is that we extrapolate our gas production growth and plan on new consuming facilities just as the capital discipline mantra impact producers and weak well economics cause a drilling slowdown. It wouldn’t be the first time the gas industry found itself with “white elephant” projects.
This story was originally featured in ON&T Magazine’s February 2020 issue. Click here to read more.
