05 Jan 2023 Prediction Time!
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 11 years, have felt confident we can make accurate predictions this year as well.
Let’s take a look at our 2022 prediction (knikpetro.com/news-and-opinion) to see how things went:
Where we were Right:
• Labor and supplies would hamper program development (unfortunately)
• Federal tax incentives not touched, but anything else the Federal Government did touch was not helpful to the Industry
• OPEC+ played ball and didn’t dump production on the market
• China and India economies did not affect pricing significantly (but expected a better rebound)
• No “fire sales” of producing leases
Where we “sorta” missed:
• War in Ukraine, which sent all commodity prices up (but who didn’t miss?).
• Thought that we’d see $100 oil in Q4 after the election, but didn’t, which is foreboding.
OK, so enough about the past, let’s talk this year:
What do we see on the domestic and international realm today?
• Rig count should go down at least 5%. Inflation makes $80 oil feel more like $60. Time to be picky on plays.
• 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
• Labor availability may increase as the general economy goes through a “dip” in Q1 and Q2.
• War in Ukraine will keep natural gas prices higher domestically for the winter.
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 and multiple other permits not being approved)
• Little to no new development support on any Federal lands or existing leases (ANWR and offshore)
What can be expect for the domestic prices as a whole?
Q1: Due to overall economic indicators both worldwide and domestically, we anticipate prices to be depressed a bit. Wouldn’t be surprised to see $50 WTI and $3.50 natural gas for a few days.
Q2: We see a market “adjustment”, where prices may rebound to what we see today. Labor and supplies more available as supply chains should have finally got to catch up.
Q3 & Q4: We see a “rebound” of sorts in the travel and manufacturing markets in July that could push demand back to where we see $90 oil again and strong natural gas prices.
What does this mean for the direct domestic oil and gas investor today?
We are anticipating oil field labor and materials to be more available, but still short prior to 2020. Success will be getting wells online the first third of the year, not in reducing development costs.
Old adage of investors going towards commodities and bonds during a foreseen market dip will bring experienced players back in.
So where’s the value? I believe the value is in the Operators who have traditional plays AND have control over oil field service vendors (or are one themselves) to deliver to the market quicker. Speed is the name of the game to be ready for price rebound in late Q2.
We have a “boatload” of those programs with experienced operators who are in it for the long haul and been with us for years. We will be showing quite a few this quarter and have some ready next week…stay tuned.