EIA Forecasts for 2015
The EIA (US Energy Information Administration) trimmed its WTI (West Texas Intermediate) crude oil price forecasts to $63 per barrel in 2015. The 2015 forecast is 17% lower than last month’s projection.
For Brent, the EIA expects prices to average $68 per barrel in 2015. This is ~18% lower than the previous month’s forecast
EIA Oil Price Forecast - Jan 8
EIA Oil Price Forecast - Jan 8
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: EIA Oil Price Forecast - Jan 8
Wood Mackenzie released on Friday its conclusions from a survey of 2,222 oil fields world-wide. Its analysis found that at $50 a barrel—around where Brent crude trades now—only 0.2% of oil supply faces negative cash flow. At $40, that rises—but only to 1.6%.
However, new supply requires much higher prices to justify the capital expenditures. Horizontal wells in U.S. shale plays are very expensive. They come on strong, but production declines rapidly. It will be foolish for E&P companies to drill more shale wells at today's oil price unless they have expensive rigs under long-term contracts or need to drill to hold valuable leasehold. As a result, we are seeing a sharp drop in drilling budgets. In a few months U.S. shale oil production will flatten since thousands of shale wells are on rapid decline.
IMO the E&P companies will not increase capital spending until they have a high degree of confidence that oil prices will remain high enough to justify the risk. Even if oil prices stabilize today and begin to drift higher, it will take six months before we see increases in capex budgets. The result will be declining global supply by year-end and could lead to an "Energy Crisis" as early as 2016.
It is difficult to time the market, but it appears there is a lot of money sitting on the sidelines that believes oil prices will soon begin to move higher.
2008 was the last time oil prices crashed like they have over the last six months. After that crash (when the global economy was much worse), the price of oil moved up over 50% from the bottom in less than six months. Who knows if that will happen again, but if North American production rolls over this world has an energy crisis. Since 2005, North America (U.S., GOM and Canada combined) is the only place that generated meaningful production growth. Since 2005, the rest of the world's production capacity growth has netted to zero. Most of the OPEC countries are now on decline.
BTW the only year in the last decade that our Sweet 16 had negative returns was 2008. 2009 & 2010 were two of the best years since I co-founded EPG in 2001.
However, new supply requires much higher prices to justify the capital expenditures. Horizontal wells in U.S. shale plays are very expensive. They come on strong, but production declines rapidly. It will be foolish for E&P companies to drill more shale wells at today's oil price unless they have expensive rigs under long-term contracts or need to drill to hold valuable leasehold. As a result, we are seeing a sharp drop in drilling budgets. In a few months U.S. shale oil production will flatten since thousands of shale wells are on rapid decline.
IMO the E&P companies will not increase capital spending until they have a high degree of confidence that oil prices will remain high enough to justify the risk. Even if oil prices stabilize today and begin to drift higher, it will take six months before we see increases in capex budgets. The result will be declining global supply by year-end and could lead to an "Energy Crisis" as early as 2016.
It is difficult to time the market, but it appears there is a lot of money sitting on the sidelines that believes oil prices will soon begin to move higher.
2008 was the last time oil prices crashed like they have over the last six months. After that crash (when the global economy was much worse), the price of oil moved up over 50% from the bottom in less than six months. Who knows if that will happen again, but if North American production rolls over this world has an energy crisis. Since 2005, North America (U.S., GOM and Canada combined) is the only place that generated meaningful production growth. Since 2005, the rest of the world's production capacity growth has netted to zero. Most of the OPEC countries are now on decline.
BTW the only year in the last decade that our Sweet 16 had negative returns was 2008. 2009 & 2010 were two of the best years since I co-founded EPG in 2001.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: EIA Oil Price Forecast - Jan 8
Dan, I'm a believer that over time the price situation will correct and probably swing to a crisis in the other direction. What worries me is that I see big time cuts to capex budgets, drilling rigs are being laid down as expected but the only company I have seen yet with no forecasted growth in production is Denbury. All others have reported big cuts in capex with modest to significant gains in production forecast for 2015.
Additionally I see that the opening round of cuts in drilling service costs appears to be 33% as evidenced by Sanchez's report that Eagle Ford well costs will drop from 7.5 million to 5 million.
While intuitively it would make sense that low prices increase demand, I have learned a very hard lesson last year about trusting the demand forecasts of IEA. It seems that the big growth was to come from China and that has failed to materialize as well as any transparency as to their true economic condition. As I understand it China has controlled oil prices internally so that the Chinese consumers nay not be realizing the benefits of low oil prices.
Thus imho the correction to higher prices will likely occur over a longer period thus making it harder to pick who the survivors will be.
I just don't know how long the unhedged Bakken producers can survive on $48 wti less $20 basis differential.
Just some food for thought.
Additionally I see that the opening round of cuts in drilling service costs appears to be 33% as evidenced by Sanchez's report that Eagle Ford well costs will drop from 7.5 million to 5 million.
While intuitively it would make sense that low prices increase demand, I have learned a very hard lesson last year about trusting the demand forecasts of IEA. It seems that the big growth was to come from China and that has failed to materialize as well as any transparency as to their true economic condition. As I understand it China has controlled oil prices internally so that the Chinese consumers nay not be realizing the benefits of low oil prices.
Thus imho the correction to higher prices will likely occur over a longer period thus making it harder to pick who the survivors will be.
I just don't know how long the unhedged Bakken producers can survive on $48 wti less $20 basis differential.
Just some food for thought.
Re: EIA Oil Price Forecast - Jan 8
For most of the E&P companies I track, production increased steadily during 2014. So, production was quite a bit higher in Q4 than Q1.
Based on what I am seeing in the budget cuts and production guidance. Production will go up a bit more in Q1 2015, level off in Q2 and then begin to decline. Most the companies have a goal this year just to hold production flat to Q4 2014. If they do that, then production year-over-year will be up. However, it will soon become clear from analysis of capex budgets that U.S. shale production will roll over sometime in 2015. My guess is sometime in Q3.
If the onshore rig count is cut in half by June, which is what I think will happen, it is impossible not to have a sharp reduction in production growth. Remember, there are now tens of thousands of horizontal shale wells on steep decline.
Based on what I am seeing in the budget cuts and production guidance. Production will go up a bit more in Q1 2015, level off in Q2 and then begin to decline. Most the companies have a goal this year just to hold production flat to Q4 2014. If they do that, then production year-over-year will be up. However, it will soon become clear from analysis of capex budgets that U.S. shale production will roll over sometime in 2015. My guess is sometime in Q3.
If the onshore rig count is cut in half by June, which is what I think will happen, it is impossible not to have a sharp reduction in production growth. Remember, there are now tens of thousands of horizontal shale wells on steep decline.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group