The Oil and Gas Situation: Reviewing 6 Predictions
As Q1 2019 comes to a close, it is time to review the status of some predictions I made here the day after Christmas for what we would see during the first half of 2019. Accurately gauging where the industry will be several months into the future is always a crap shoot, and as usual, I find myself feeling glad I didn’t go out and bet the farm on any of these.
First, let’s look at what I had to say about the domestic rig count as calculated by the folks at DrillingInfo:
…my first prediction is that we will see a gradual fall in the domestic U.S. rig count throughout the first half of 2019. Indeed, the DrillingInfo Daily Rig Count already fell by about 3% during December, from 1160 to 1120 on December 25. I’m betting that, by June 30, that measure will be below 1050…
This particular count finished the quarter at 1049, after falling slowly but steadily throughout the first three months of the year. This represents a 9% drop since Christmas day, and there is no real reason to expect this trend to change during the second quarter, with so many upstream companies prioritizing stock buybacks and other programs designed to return capital to investors and lenders over the mad rush to increase production we saw throughout 2017 and the first 8 months of 2018.
A reasonable updated guess would be that we will see the DrillingInfo count fall to right around 1000 by the time June 30 rolls around.
What about crude prices? Here’s what I predicted they would do in Q1:
…my second prediction is that the price for WTI will rise again, but will not exceed $60 during the first half of 2019.
As things turned out, I had the general direction of crude prices right, but underestimated how rapidly they would rise, as WTI closed at $60.14 in Friday’s trading. The basic market dynamics that advocated in December for what has been a 20% recovery in the WTI benchmark remain in place today. Global demand continues to rise more rapidly than all the experts thought it would at the first of the year, and the OPEC-plus nations still maintain pretty strong compliance with their export quotas.
Reinforcing those prevailing dynamics is the fact that U.S. production is not rising as rapidly thus far in 2019 as it did throughout 2018. In fact, the U.S. Energy Information Administration (EIA) announced on Friday that domestic production actually dropped slightly from December to January, the first such drop in month-to-month production in more than half a year. That sadly put the lie to my third prediction, that “the domestic oil and gas industry will continue to set new all-time production records in each of the first six months of 2019.”
If this is the start of a trend, with U.S. production growing at a slower pace as the rig count drops, it will put even more upward pressure on crude prices, obviously. This will be interesting to watch as we enter the time of year when producers are forming up their drilling budgets for the second half of the year.
My next prediction had to do with the booming Permian Basin and its transportation bottleneck:
…my fourth prediction is a no-brainer: The current pipeline capacity bottleneck coming out of the Permian Basin will be resolved by the third quarter of 2019. By the end of 2020, the region will enjoy a significant surplus of pipeline capacity.
In reality, that bottleneck has already been significantly resolved, and we have seen the spread between WTI and the Brent crude price narrow fairly dramatically. After reaching almost $10/bbl, that differential had closed to a little more than $7/bbl as of Friday. We should see it narrow even further as more Permian takeaway capacity comes online over the remainder of 2019.
My fifth prediction in December was a complete no-brainer:
…natural gas prices, after a brief run-up over $4.50/mmbtu in November, will fall back down below $3.00/mmbtu early in 2019 and stay there. I include this one only so that I can be assured of getting at least one prediction right.
The NYMEX benchmark for domestic natural gas closed at $2.66 on Friday, with no real reason to expect it to move significantly in either direction in the coming months. Ugh.
My final prediction from that December 26 piece was that I would inevitably find myself back here on June 30, feeling highly embarrassed about several of the predictions. Three months into the year, it seems I’ve gauged the general direction of the market pretty accurately, but underestimated how rapidly it would change. I’m ok with that.