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Oil Survives Bearish Backlash

Crude benchmarks posted steep losses…

Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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EIA’s Contradictory Oil And Gas Predictions For 2017

Canol Shale

Monday’s drilling productivity report from the EIA shows the agency’s somewhat pessimistic expectations for domestic U.S. production.

From October to November, the EIA estimates total new-well oil production in the seven largest energy-producing regions to increase in the Niobrara, Bakken and Eagle Ford fields while staying virtually flat everywhere else. For new-well gas production, an increase in the Marcellus field compares to modest gains elsewhere. Overall, the rig-weighted average was only 2 barrels and 159 thousand cubic feet a day, respectively. DUC figures were generally down, apart from an increase of 52 DUC wells in the Permian field.

But while new wells are still being drilled, production overall is forecast to fall by 60 thousand barrels per day, offset only by a 30 thousand increase in the Permian, for a net loss of 30 thousand barrels. Equally, natural gas production is set to fall by 309 million cubic feet, offset only by increases in the Marcellus and Permian for a net decline of 178 million cubic feet a day.

The key take-aways from this data are the on-going downward trend in American crude oil production, which has fallen from a high in 2015, as well as the sudden drop in natural gas production recently reported. As Oil&Gas points out in their analysis, expectations for the Permian field seem bright as long as domestic demand for natural gas remains high and prices stay above $3.00 per MMBtu. The analysis also indicates that new-well efficiency is up, as the general (though small) increase in new well production shows, versus the general downward trend in total field production. Related: Oil Won’t Crash Before The OPEC Meeting

Higher crude oil prices, which now seem likely to stay above $50, at least until the outcome of the planned OPEC freeze in November becomes clear, could help U.S. production recover in 2017. Natural gas output has been falling steadily, dropping by 0.28 billion cubic feet in September. The EIA short-term energy outlook released last week estimated that U.S. production for 2016 would average 77.5 billion cubic feet and 81.2 billion cubic feet in 2017, implying that production would bounce back, driven both by U.S. domestic demand, increased electricity demand in Mexico and increased exports of LNG from U.S. terminals. Yet total demand for 2016, at 77.5 bcf, was 1.5 percent lower than 2015, the first such decline since 2005.

A key driver of increased natural gas demand is the cold: winter rolls around and demand for heating gas goes up. But after the mild winter of 2015-2016, the EIA expects a more normal winter this year, with a commensurate increase in natural gas demand. Their figures are based on the National Oceanic and Atmospheric Administration (NOAA), which expects temperatures to be 3 percent higher than the average of the previous ten years, but lower than last year. Climate change and higher temperatures make that an uncertain prospect, however. It’s possible that freak weather systems, shock storms and unexpected heat waves (including one currently in the American South and Texas, where temperatures remain in 90 degrees Fahrenheit in the middle of October) could send heating gas figures swinging up and down. Related: Blowing The Competition Away: The Wind Power Boom In The U.S.

Even with increased new-well efficiency, and the vitality of the Permian and Marcellus plays, could a more general decline in natural gas demand be in the offing? A recent analysis hints that total, global demand for oil could peak in fifteen years. As for LNG, there is hope (spurred on by some political rhetoric) that energy exports could unlock the full potential of U.S. oil and natural gas reserves, which, despite falling production, continue to go up. But competition for the best LNG markets remains fierce, prices are far lower than they were two years ago when development of LNG export facilities began in the U.S., Australia and elsewhere, and supply seems set to out-pace demand for at least the next year or two.

The EIA snap-shot highlights the efficiencies that American drillers are bringing to the biggest natural gas and oil plays. But the numbers show the on-going uncertainty in the immediate market. Somehow, production will fall then spike up again (to where the EIA predicts they will average over 80 bcf for 2017). Consumption, which may falter initially, will also shoot up, assisted by healthy demand for American LNG overseas. Prices, according to the EIA, will average just $3.00 MMBtu, yet today, due to tight supply, prices are going up to $3.30 MMBtu and may go up further as production continues to fall…unless production rises again, as the EIA seems to expect.

I’m inclined to agree with the recent suggestion that the EIA’s figures just don’t make sense, or are pointing at contradictory conditions prevailing in 2017.

By Gregory Brew for Oilprice.com

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