Energy Prospectus

Comments below from Keith Kohl's newsletter:
Just prior to the pandemic, there were 791 rigs running in January 2020, and in January
2019, there were 1,075 drilling rigs in the U.S.
In fact, U.S. drillers have turned to their DUCs for help over the last two years. These
are wells that were drilled but not completed. During 2020, U.S. oil companies were
able to tap into about 1,000 DUCs and avoid spending cash to drill new wells.
Last year, companies relied even more on DUCs, having completed roughly 2,900
of them.
To put a little more perspective on the cost savings, this cut approximately $10 billion
in drilling expenditures over the last two years.
Today, the inventory of drilled but uncompleted wells is at seven-year lows.
But with drilling activity rising, will we see U.S. production soar higher in the short and
medium term? There’s a good chance U.S. output won’t soar as high as many believe
because the "Good DUCs" have all been completed.

2022 WTI and Nat Gas Price Forecasts from Robert Rapier on OilPrice.com.

https://oilprice.com/Energy/Energy-Gene ... -2022.html

Normally I find Robert's perspectives right on the mark, but not today.

First of all, looking at the WTI Futures Curve, looking at Dec 2022 contract, yes it is about $7 below the front contract, but that in no way means that crude next fall will be in the Mid $70s. Last year crude went from $47 to $73 on the Dec 2022 contract. As the Dec contract nears expiration, its volatility will increase and the market tightness will be more realistically reflected in the price. I expect by late fall, the $7 difference between the front month and 12 month out contract will remain, but the fall price will be a lot higher than $75.

Robert makes no mention of the high grading of DUCs, and the incredible amount of drilling it will take to achieve $75 WTI for the year. In order to average $75 for the year, the second half of the year will need to average perhaps $65 to make up for the likely $85 average for the first half. This seems preposterous given the lack of investment and the current capital expenditure plans. Second, the labor shortage pretty much guarantees we can't deploy enough rigs to bring that much oil online.

Finally, Russia and OPEC are showing every sign of maxing out production, so their production wildcard status seems to remain as far as I'm concerned, but To The Downside as geopolitical risks in the Middle East grow. Price spikes to $100 or more seem far more likely than a drop to $65 this fall.

Regarding Natural Gas production, he is overlooking the growing LNG export capacity, the continued migration from coal to Nat Gas of power generation, and the odds that we can really rebuild inventories before next fall. If Robert is wrong about crude production ramping up quickly, then he is also wrong about Associated Gas Production ramping up.

Then there is the growing pressure to develop even more LNG export capacity. Nothing about either the Asia or Europe situations suggest a slow down in LNG Capacity development. The whole Ukraine situation will simply ramp up Europe's begging for larger LNG Fleets and more frequent delivery.

All of this is to say I was disappointed Robert's expert opinion was not as all encompassing as I had expected.

Kevin

Making predictions is difficult, especially when they are about the future (famous Yogi Berra statement).

I think the "Right Price" for oil is in the mid-$80s, but I think the likelihood of a spike to over $100 within a few months is now over 50%.

Marshall Atkins at Raymond James predicts $110/bbl WTI within six months (early Q3) and then settling back to $80 by year-end.

U.S. oil production will rise, but not get back to ~13 million bpd this year and maybe never.

I expect natural gas to average around $3.50, but weather over the next few months will have a big impact. If natural gas in storage is below the 5-year average in April (likely) and LNG exports stay high (also likely) then natural gas and NGL prices should be very good this year. It will be much easier for the U.S. to ramp up natural gas production than the ramp up oil production. However, adding more infrastructure to get the gas to markets is also required.

Robert Rapier is a good guy and an EPG member.

Yes Robert is a great guy!

And as Yoda said: "Always in motion is the future!"