January 2021 – Prediction Time!

January 2021 – Prediction Time!

At the beginning of the year I like to write an opinion regarding where we think the industry will be domestically for a calendar year and where the advantage may be from an investment standpoint. We’ve been MOSTLY accurate (taking out 2014) in the past, have felt confident we can make a decent prediction with some caveats.

To recap 2020, our prediction was fairly close…if you don’t count the pandemic!

So let’s talk about what we saw in 2020 on the world market:

  • Rig count was down by at least 40% throughout the world.  Lots of layoffs from top producers up and down the chain.
  • The United States was STILL the strongest player on the world oil and gas market.  The US controls both imports and exports in their hemisphere and what they will and can take from the Middle East. 
  • Large US producers evened out supply and demand for the most part by end of Q3
  • Continuing sanctions on Iranian oil and pressure on their typical buyers to refuse delivery has certainly helped. It has helped stabilize the entire oil economy in the Middle East.
  • Anyone who shorted oil in Q1 got killed in early Q2 (but a good time to pick up some commodities).
  • A “little” blip where you had to pay someone to pick up oil from West TX in April!

So, what plays into this year?

This year, we anticipate that we will see similar policies implemented by the Federal Government side as we did in the Obama Years. This will create the following:

  • Little to no support for new domestic infrastructure (think Keystone Pipeline)
  • Little to no new development support on any Federal lands or existing leases
  • Open LNG business to China
  • Federal Tax incentives being left alone

Leading to: federal lease interest with any type of polarity (environmental groups) will not be pursued by major oil companies (ex: ANWR bids were abysmal) AND mineral rights on private land will be valued higher.

What do we see on the domestic and international realm on a whole?

  • Rig count and stockpiles should be fairly stable throughout the year as world and domestic demand is only seen to rise no more than 5%.  Rig count may have a higher percentage of re-entry vs exploration.
  • OPEC+ members will be coming back to play “ball” with the US markets…keeping all commodities stable…for about 6 months. (Russia went after Trump and US…didn’t really pan out for them)
  • Although their demand will grow, neither China nor India will develop enough new demand to outpace supply based on their current overall economic conditions.
  • LNG and crude/refined product export market will slightly increase with a new China trade deal.

Of course, there are possible factors that could fluctuate prices rapidly:

Some oil economists are predicting market price increases with volatility especially in Q1. It may create an artificial price spike with WTI and natural gas pricing in Q2.

Middle East release of oil (Iran)  – pretty low chance.

So, what does this mean for the direct oil and gas investor today?

We are anticipating no fire sales of leases, production, or equipment nor any soaring prices of operating expenses.  With little demand for exploration, it will keep lease, and vendor/equipment prices down.

We are expecting a statistically significant price jump in both Brent and WTI. 

Lack of exploration makes for a scenario for increased demand and prices in 2022 with supply “chokes”.

So, what can be expect for the domestic prices as a whole?

We’re predicting no lower than $45 WTI/ $2.70 natural gas and no higher than $73 WTI/$3.30 natural gas for 2021 for extended periods.  WTI is $52 today and gas is $2.70…

We see some significant short and medium gains to be made for those who get in early into programs that have good potential and solid site management practices.