05 Jan 2022 Prediction Time! (re-posted)
At the beginning of the year, we like to write an opinion regarding where we think the upstream industry will be domestically for the calendar year and where the advantage may be from an investment standpoint. We’ve been highly accurate (taking out 2014) for the past 10 years, have felt confident we can make accurate predictions this year as well.
Let’s take a look at our 2021 prediction (knikpetro.com/news-and-opinion) to see how things went:
Where we were Right:
• West TX Intermediate at $75 by end of year
• Biden Administration shut down Keystone, limited BLM, fracking related restrictions.
• Spike in Q3 and Q4 prices
• Federal tax incentives not touched
• OPEC+ played ball and didn’t dump production on the market
• China and India economies did not affect pricing
• No “fire sales” of producing leases
• Our main prediction: “We see some significant short and medium gains to be made for those who get in early into programs that have good potential for production and solid site management practices. especially in Q1.”.
Note: if you invested in Q1 and saw returns in Q3, your timing was great! (Blackhorn WI purchasers specifically)
Where we “sorta” missed:
• Neither oil nor natural gas hit lows below where they started in 2021 at any time
• Natural Gas was a better performed than what we expected, especially for a very short duration a few months ago.
• Field labor and consumables availability not matching demand.
What we didn’t anticipate was HISTORICAL inflation…something we haven’t really seen in decades in such a significant way. This pushed commodity and material prices further up than anticipated across the board.
OK, so enough about the past, let’s talk this year:
What do we see on the domestic and international realm today?
• Rig count and stockpiles should be fairly stable throughout the year as world and domestic demand is only seen to rise no more than 3%.
• Although there are OPEC+ threats to increase production, everyone is still making $$ and not looking to start a pissing contest to mess with the markets. Those lessons were learned a few years ago.
• Neither China nor India should develop enough new demand to outpace supply based on their current overall economic conditions. In fact, I see China taking on less with their real estate and geopolitical fiascos creating a “de-coupling” of foreign investors
• Lack of labor and equipment in oil field services will keep development prices high and production lagging in comparison to balanced investment/production.
What role does domestic politics plays into this year?
This year, we anticipate not much different in domestic policy from last year. The Biden Administration is beholden to dreadful energy policy, but at least it’s predictable.
• Little to no support for new domestic infrastructure (think Keystone Pipeline)
• Little to no new development support on any Federal lands or existing leases (ANWR)
• Federal Tax incentives being left alone
During an election year, it’s better to make no headlines than any, and we expect there are smart enough people around Biden to know that.
What can be expect for the domestic prices as a whole?
Q1: We currently have natural resource and real estate acquisition demand outpacing actual direct use for product being produced today. This is a product of rapid inflation in 2021 and has created a “scarcity” mindset that exists in the markets on all real assets today. This could push prices up to 15% from today.
Q2: We see a market “adjustment”, where prices could dip down to 20% from today in May. No change in labor or materials costs, so it’s time to ride out.
Q3 & Q4: We see a “rebound” of sorts in the travel and manufacturing markets in July that could push demand back to Q1 numbers, but realistically end up 10% from today’s prices
We’re predicting no lower than $58 WTI/ $3.50 natural gas and no higher than $90 WTI/$5.00 natural gas for 2022 for extended periods.