04 Apr Predictions 2019
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) and in the past, have felt confident we can make a decent prediction with some caveats.
To recap 2018, our prediction in the beginning of the year was very close to actual. What we didn’t expect was the significant downturn in Q4 in the markets, which in turn with a bit of oversupply, to drive the markets down everywhere. We did, however, predict the low on West Texas Intermediate (WTI) correctly. Also, we didn’t expect natural gas go to $4.50…even though it was very short lived and completely predictable it would come back down to earth.
So let’s talk about what we saw in 2018 on the world market:
The US has become the strongest player on the world oil 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 created several periods of oversupply due to technology enhancement on new and re-entered wells…the same technology that helped the US become #1.
China’s economy did not make any significant gains due to internal and external factors, therefore not attributing to any significant demand for hydrocarbons on the world market.
The spot price of Midland WTI dropped significantly compared to WTI from other areas, some differences I heard as much as $17 less!
This year, 2020 we anticipate the following:
- Although optimistic budgets were set by most large exploration companies in Q3 2018, we expect rig count to be declining throughout Q1 2019 and pick up in late Q2.
- OPEC+ members will keep playing “ball”. They really have no choice.
- Neither China nor India will develop enough new demand to outpace supply based on their current overall economic conditions. This was the case last year and we even expect some contraction.
- Midland WTI pricing will stay suppressed until Q3 when pipelines are in place to move product.
- LNG export market will increase, but not at a pace to significantly affect price.
Of course, there are possible factors that could fluctuate prices rapidly:
- Wall St. types are predicting growth but with volatility especially Q1. This will create a little chaos with WTI and natural gas pricing. Hedge funders may get killed trading (we don’t play that game here).
- Possible Middle East tensions disrupting oil flow (like almost any year)
- Iran Sanctions (and how they are applied)
- Trump Factor (again, the wild card)
- So, what does this mean for the direct oil and gas investor today? It’s a year of volatility up close but with slight uphill trend, which means that both buy and sell side will stay in balance as it did much in 2018. We are anticipating no fire sales of leases, production, or equipment nor any soaring prices of operating expenses or leases either.
- It’s the long game, which I feel will pay significant dividends for the direct investor in the next 2-5 years.
- We’re predicting no lower than $42 WTI/ $2.10 natural gas and no higher than $65 WTI/$3.10 natural gas for 2019 (for extended periods).