Energy Prospectus

The price of West Texas Intermediate (WTI) crude has taken the oil and gas industry for a wild ride since June. From north of $105, so far we’ve rocketed down the first hill of the rollercoaster and we’re still screaming with our eyes closed.

But if you go by the published WTI price forecasts of 32 large banks, crude is about to bottom out. The bank estimates, supplied by Bloomberg, cover the banks’ average price forecasts on a quarterly basis.

For list of estimates see: http://www.oilandgas360.com/chart-week- ... 6-26401157

Of the 32 banks, only five have an average Q1’15 estimate below the $45.00 threshold. On Thursday, WTI traded between $46.92 and $51.27 and that’s just prior to lunch time. That may be the 2015 definition of volatility. For the quarter we’re in, 14 banks have set their estimates above the $60.00 mark. According to all of the banks, the price is expected to consistently rise throughout 2015, and nobody has oil in the $40’s by Q3’15. Nine expect WTI to climb back into the $90’s range by the fourth quarter. Following the trend line, the midpoint of the spot price is projected to pass the $80/barrel mark by year-end.

WTI prices have experienced a slight relief in recent trading. Yesterday WTI traded higher than Brent for the first time since July 2013, but Brent has since established its dominant position, and at this moment Brent, at $48.99, is trading at a $1.81 premium to WTI. The majority of analysts are predicting a Brent-weighted differential of roughly $5 in their near-term forecasts, indicating how closely the two will be linked in the revamped market. The average spread on a trailing twelve months basis was nearly $9.

If the U.S. approves crude oil exports, WTI should move over Brent.

> U.S. oil consumption in October 2014 was 19.6 MMBOPD, up 3.1% compared to the prior month and 1.6% higher than the same month last year.
> U.S. crude oil production was 9.1 MMBOPD, up 0.7% compared to the prior month and 17.6% higher than the same month last year.
> The average near-term futures price for WTI in December 2014 was $59.29 per barrel, down 21.8% from the prior month and 39.4% lower than the same month last year.
> The five-year strip at December 31, 2014 was $64.97 per barrel.

I am now expecting U.S. crude oil production to peak within six months at approximately 9.4 MMBOPD and then begin to decline. Since North America is the only region with sustained oil production growth since 2005, this means global production could be on decline by year-end. We are "planting the seeds of the next Energy Crisis".

The U.S. onshore rig count will fall rapidly to around 1,000. Less than 700 rigs will be drilling for oil within a few months. That is not enough to sustain production growth since we now have tens of thousands of horizontal shale wells on steep decline. Product rates from horizontal shale wells declines by 40% to 60% within twelve months after they are placed on-line.

It would be interesting to see how he defines "high cost producers". How can North Sea be left out?

On Wednesday I made a presentation to a group of CFA's in Houston. The title was "Oil & Gas Market Update: Where do we go from here?" I will be opening next Friday's EPG luncheon in Houston with highlights from my talk.

One of my slides shows that drilling new wells in most shale plays is sub-economic unless oil is $70/bbl. Only the Super Sweet Spots like Karnes County for the Eagle Ford are economic at $50/bbl. KEEP IN MIND THAT I AM TALKING ABOUT NEW WELLS.

Production expenses (severance taxes, LOE, gathering, processing, transportation) are less than $15/bbl in the shale plays, so very few existing wells are sub-economic on a go-forward basis.

Many companies will cut capex to maintenance only, so the active rig count will continue to drop. My SWAG is that Supply/Demand will tighten by 200,000 BOPD per month. Take a look at this chart and you will see why oil prices should firm up in Q3: https://www.iea.org/oilmarketreport/omrpublic/

Read the highlights of the IEA report at the link above and you will see why the energy sector stocks did so well on Friday. Oil Supply/Demand is already showing signs of tightening.

From IV:

Iraq produces record 4 million barrels per day of crude in December

Jan 18 (Reuters) - Iraq produced a record of around 4 million barrels per day (bpd) of crude oil in December, Oil Minister Adel Abdel Mehdi announced on Sunday.

"It is the first time Iraq has achieved this," Abdel Mehdi told a press conference alongside Turkish Energy Minister Taner Yildiz.

Abdel Mehdi also revealed plans to export 375,000 bpd for the first three months of 2015 from around the northern city of Kirkuk and the Kurdistan region. He said those fields would increase production to 600,000 bpd as of April.

The previous monthly record for Iraqi production was 3.56 million bpd in 1979, according to an official from Iraq's State Oil Marketing Organization.

Abdel Mehdi told reporters that Iraq had set the level of exports for Iraq's northern and Kurdish oilfields for the first three months of 2015 after the meeting with Yildiz.

"We have agreed to keep the level of exports at 375,000 bpd for the first three months of the year, and as of April, we will increase exports to 600,000 bpd," Abdel Mehdi said.

The oil from Iraq's north is exported via a pipeline network from the Kurdistan region to the Turkish Mediterranean port of Ceyhan.

The arrangement is the result of an interim deal reached between Baghdad and Iraqi Kurdistan in early December after years of acrimony between the two sides over oil rights.

Under the deal, the sides agreed to ship 300,000 bpd of oil from Kirkuk and 250,000 bpd from Kurdistan via the Kurds' pipeline network.

Baghdad and the Kurdish region were prompted to set aside their differences by the jihadist group Islamic State's seizure of territory across large sections of northern Iraq. (Reporting By Ahmed Rasheed, Writing by Ned Parker; Editing by Kevin Liffey)

http://uk.reuters.com/article/2015/01/1 ... SN20150118

-----------------

The big jump in Iraqi production may seem abrupt, but Iraq was producing 3.6m barrels as recently as February 2014, this dipped by 500K due to the destruction of the Kirkuk Ceyhan pipeline. The recently signed deal to export Kirkuk oil through Kurdistan has brought back this production. Meanwhile both the Southern fields and Kurdistan added another 400K barrels since. I believe the easy increase in Iraq oil has already taken place, the next major jump will take place in the latter part of the decade if investments in green-fields are concluded in time. Follows is the details from the Join Analysis Policy Unit (JAPU) on Iraq from 2013:

http://www.google.com/url?sa=t&rct=j&q= ... YSpX8a3t1w

According to JAPU, Iraq was expected to achieve 4m to 5m barrels in production by 2016/2017 followed by a jump to 6m by 2020 and 8m by 2035.

Regards,
Nawar