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The Oil And Gas Situation: Expect Strong Prices Through April

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As we meet the halfway point in January, let's review the current oil and gas situation:

  • What is that jump in the rig count really telling us? 

On Friday, Baker Hughes reported that the U.S. domestic rig count had risen last week by 10 rigs, the most in a single week since last June. The DrillingInfo daily rig count, which uses a slightly different process than Baker Hughes, showed a count of just a few rigs higher than the count had sat on Dec. 18.

Both counts show an increase since the first of the year — DrillingInfo's count has risen by about 30 since Jan. 1; the Baker Hughes count is up by just 10 since Dec. 30 — but this follows a drop in the count that takes place most years around the holidays. The bottom line is that neither count is up by even 1% since mid-December. So what it's really telling us at this point is not much.

Yes, the U.S. Energy Information Administration (EIA) does project that overall U.S. oil production will soon jump up to over 10 million barrels of oil per day (bopd) and will surpass the previous all-time high. That's pretty much baked into the cake at a WTI price above $60. But as the industry continues to improve expected recoveries and cut drilling times related to each new wellbore, this ramp-up in production will be achieved with fewer new rigs than were activated during the first half of 2017.

So where the industry activated about 300 additional drilling rigs during the first half of 2017, we should expect this year's increase in U.S. production to be accomplished with fewer than half that many additional rigs coming onto the market.

  • Is there going to be a rush by companies to lease new areas in the offshore?

Well, no, at least not in 2018. Yes, the Trump Administration did announce an aggressive new 5-year plan for leasing in federal waters on January 5, but that plan has already seen Interior Secretary Ryan Zinke take 5 million acres in the Eastern Gulf of Mexico out of play due to objections from Florida elected officials. Ultimately, the plan must receive congressional approval, and the process for that has just begun, and will consume most of the year.

In the meantime, environmentalist conflict groups are lining up challenge parts of the plan, as are officials from other states, especially those along the Atlantic and Pacific coasts, which have long been off-limits to oil and gas leasing. In announcing his concession to Florida Governor Rick Scott, Sec. Zinke stated that Florida is "unique," but people from California and Washington and Virginia and Maryland think their states are "unique" as well. With all this "uniqueness" flying around, it's pretty hard to push through a one-size-fits-all waters plan for development in the federal OCS.

Bottom line, don't expect much, if any, real expansion in the OCS this year.

  • But we will see expansion in LNG exports this year, right?

You bet.  The EIA is projecting U.S. LNG exports to average about 3 billion cubic feet per day (bcfd) during 2018, up from 1.9 bcfd during 2017. Dominion Energy's Cove Point export facility in Maryland came online late in 2017 and will ramp up to its full capacity of 1.8 bcfd this year. Georgia's Elba Island and the Freeport LNG terminal in Texas are both also scheduled to initiate operations in 2018.

The EIA also reported that all of this LNG export expansion made the U.S. a next exporter of natural gas during 2017 for the first time in 60 years. The fact that this all happened during a time when domestic demand for natural gas in manufacturing and power generation was also rapidly rising, and the number of rigs drilling for natural gas remained essentially static just demonstrates the massive amount of reserves of this crucial resource that exists in the U.S. today. It's a real blessing.

  • Can the oil price continue rising from here?

That's a great question. As the new year dawned, few if any analysts were expecting the Brent price to jump up over $70, but that's exactly what it did on Monday, as WTI ran up above $64. Although all sorts of technical, highly complicated analyses have been written on this, nothing has really changed over the last few weeks that will significantly impact the overall trajectory of the price for oil.

As has really been the case for the last year now, there are three main factors to consider here:

  1. Will OPEC/Russia continue high compliance with their export limitation agreement?
  2. How rapidly will overall U.S. production increase?
  3. How rapidly will global demand increase?

With global supply and demand essentially in balance now, these are the macro factors that really matter. At least for now, the answer to item #1 is yes, though the parties to that deal will meet in April to reassess their situation.

So long as OPEC/Russia output remains basically static, items #2 and #3 interrelate to one another to determine price movement. EIA's projection of 1.7 million bopd in global demand growth during 2018 will far outpace supply growth from the U.S., which no one expects to exceed 1 million bopd.

The market is probably over-bought at this point, though, so we could see prices fall back somewhat in the short term. But overall, at least until April, we should expect the oil price to remain pretty robust in comparison to recent years.

That's the oil and gas situation for now.

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