It's the end of the year, and that means it's time to
review my oil and gas price forecast for 2013, look into my crystal ball, and foretell
prices for 2014.
Reviewing my 2013 forecast
At the end of 2012, I
forecast that Brent Crude (the London
benchmark price, which serves as a global proxy for oil prices) would average
$105 per barrel (bbl) in 2013, and that West Texas Intermediate (WTI), the North
American benchmark, would average $90 to 95/bbl.
In the spring, gas prices shook off 20 straight months of
unprofitably low levels and shot over $4 per million British thermal units (MMBtu). Accordingly, I
updated my gas call in
May to $4.50/MMBtu by the end of the year, and left my oil price calls
With no articles on my
publishing schedule until late January, this seems a good time to run the
As of this writing, with 49 weeks of data available for
has been $108/bbl and WTI
has been $98/bbl on a daily averaged basis. Spot natural gas is selling for
$4.24 and front-month gas futures now stand at $4.40/MMBtu.
Natural gas prices have charged straight up from $3.60/MMBtu in mid-November; a
cold winter is forecast; and gas in storage is 3 percent below the five-year
average and 7 percent below year-ago levels. It seems quite possible that my
$4.50 target will be achieved by the end of the year.
My oil calls were only $3/bbl under the actual averages in a
year in which the spread between the highest and lowest prices was $22 for
Brent and $24 for WTI. That's close enough to trade profitably. And, as I
detailed in my forecast one year ago, it's about as accurate as the majority of
the analysts that Reuters surveyed, and far more accurate than the aggressively
bearish or bullish calls made by analysts at Raymond James, Bank of America
Merrill Lynch, and a few other research shops.
Therefore, I'm going to count all three calls successful.
I'm also chalking up the third year in a row that I have won the oil price bet
with a small group of oil-literate friends.
The demand picture for 2014
At this point, readers unfamiliar with my
oil price model may want to revisit it, along with my June
2012 update of the model.
Predicting average prices for 2014 is harder than it was for
One year ago, it was quite clear that spare capacity would remain at
comfortable levels, and that the effects of the recession in OECD (developed
world) countries would keep demand sufficiently muted through the rest of the
year to accommodate burgeoning demand in the developing world. The thesis I
laid out in
March 2012 remains intact: Asia is still firmly
in the driver's seat as the global source of demand growth. Indeed, non-OECD
demand recently overtook OECD demand globally for the first time in history.
But now the sort-of economic recovery is pulling demand
higher in OECD countries as well. According to the U.S. Energy Information Administration (EIA), weekly product supplied has recovered from a low of 18 million barrels per day (mb/d) in February 2012 to 21 mb/d in
the second week of December 2013, a level last seen in the pre-crash days of 2008. (So much for "peak demand.") U.S. demand appears
to be in a gradually rising trend.
European demand has also risen steadily from a 12.8 mb/d low
in January 2013 to 14.1 mb/d in July (the most recent month for which EIA has data).
In its November Oil Market Report, the International Energy Agency (IEA)
showed European demand for the third quarter at 14 mb/d.
In fact, oil demand appears to be growing globally. IEA forecasts
that global demand in 2014 will climb to 92.4 mb/d, 1.2 mb/d more than the 2013
level, which would be a new all-time high. Meanwhile, inventories have
"plummeted" in industrialized countries as rising demand in the
second quarter ended two straight years of declines, according
The supply picture
The question then becomes: Can supply keep up?
Here, we must
look to U.S. tight oil production, for it has been responsible for the vast
majority of oil supply increase for the past several years. But we have good
reasons to believe that the trend of the last two years, where tight oil
production added 1 mb/d each year, will not continue in 2014.
Data in the EIA's Drilling
Productivity Report indicates that 70 percent of new production in the
Bakken shale, and 77 percent of new production in the Eagle Ford shale, will be
needed just to make up for the decline of rapidly depleting legacy wells.
Unless drilling rates increase substantially from current levels (and there is no
indication that they will), growth is set to moderate considerably in 2014.
David Hughes, the Canadian geoscientist whose
refreshingly transparent work on shale gas and tight oil I have regularly featured,
presented persuasive new data at the 2013 Transatlantic Energy Security
Dialogue event I attended on Dec. 10 in Washington, D.C.
In March, I highlighted his
model for U.S.
tight oil production, which forecast that it could peak in 2016 at a level not
much higher than today. With almost a year of additional data to go on,
Hughes now calculates that Bakken production could peak at just over 1 mb/d in
2015, and the Eagle Ford could peak at around 1.4 mb/d in 2016. (This assumes that drilling gradually declines from 5,500 wells
per year currently to 3,000 wells per year when the fields are drilled out.) Hughes
estimates that the two plays will likely see an end to drilling in 2025, and
that their combined production will likely fall to nearly zero by 2035. This
scenario, in which the combined total recovery from both fields is 11 billion
barrels (1.5 billion barrels have been recovered so far), assumes there
are no constraints on capital expenditures ("capex") for drilling,
and that 80 percent of more than 70,000 drilling locations are accessible and
Hughes estimates there may be 0.7 - 0.8 mb/d of remaining growth between those two fields, which collectively make up 74 percent of all U.S. tight oil
production. The other tight oil plays (the Permian, Niobrara and Utica, to name the main
ones) have been pretty lackluster thus far, and as I wrote in my last
column, we shouldn't expect much if anything from the Monterey Shale.
More ominous is the continued rise in oil production costs pegged to these diminishing production returns. Hughes estimates that 48,000 more wells will be
needed to complete his production model for the Bakken and Eagle Ford,
at a cost of roughly $450 billion, and that those wells will be increasingly
less profitable than the wells drilled so far as drillers saturate the
"sweet spots" and begin drilling less prospective areas. If investor
appetite should wane at all, many of these new wells might never be drilled,
and production from these fields would fall below current levels sooner than
his model suggests.
Mark Lewis, the former chief oil and gas analyst at Deutsche Bank,
took up that story line during the Dialogue event via a videoconference link from the simultaneous
session held in London.
He noted that many companies in the oil and gas sector are being forced
to liquidate assets to pay for the rising cost of drilling for new reserves,
because cash flow from production isn’t sufficient to pay for it. The increased
production from new unconventional sources like tight oil has only been
possible because oil prices tripled, he noted, but prices have been flat since
2011 while industry capex has risen another 20 percent. Further, that
investment has been made at a time of record low interest rates in real terms. If
the divergence between price and costs continues -- and especially if interest
rates rise back to normal levels -- investors will get cold feet and supply
growth will falter.
So while we will probably get some additional growth from U.S. tight oil
in 2014, it won't be another million barrels per day. Globally, I don't see
where significant new production will come from. Saudi Arabia is unlikely to
increase production unless prices become uncomfortably high. Even with the easing of sanctions against Iran, its
production won't increase much in 2014. Canada
are now the global poster children for rising costs, so I expect their
production gains to be very modest.
Given Hughes' data on U.S. tight oil trends, I am particularly
dubious about the IEA's forecast for non-OPEC supply to rise by 1.7 mb/d in
2014. I expect less than a 1.0 mb/d increase from those countries; perhaps as little as a 0.5 mb/d increase.
For OPEC, IEA notes
that supply has been falling in recent months as "[r]enewed disruptions in
Libya and smaller drops in Nigeria, Kuwait,
the [United Arab Emirates] and Venezuela more
than offset higher output in Iran,
Iraq and Angola." IEA's estimate for
OPEC supply next year is 29.3 mb/d, well below November's 29.7 mb/d output for
One final point of consideration: In his London
presentation, Lewis offered a chart showing that global crude oil exports have
been declining since 2005, as major producers (particularly in the Middle East)
consume more of their own oil to fuel their growing economies. This little-considered
factor will continue to support prices, as growing demand meets shrinking
Moving from tight oil to shale gas, Hughes' latest data
shows that output is only increasing in the Marcellus Shale (located in Pennsylvania and West
Virginia). Excluding the Marcellus region, U.S. shale gas production peaked in
August 2012, and has declined 5 percent since. Excluding the Marcellus and
associated natural gas produced from tight oil plays, U.S. shale gas production peaked in
November 2011 and has since declined 12 percent. Between the top five shale gas
plays, constituting 81 percent of U.S. shale gas production, the
average field decline rate is now 37 percent per year.
Even so, production is still growing significantly from the
Marcellus, driving total U.S.
gas supply higher. Total gas production rose slightly more than consumption did
in 2013. After working over the noisy monthly data in the EIA's Drilling
Productivity Report, it became clear that Hughes' insight about the
Marcellus being the main driver of increasing production is key. EIA's data
(through September) indicates that the Marcellus was responsible for 97 percent
of the 2013 growth in the combined gas production from the Bakken, Eagle Ford,
Haynesville, Marcellus, Niobrara, and Permian plays, as declining production
from some plays canceled out increasing production from others.
My forecast for 2014
recent monthly Reuters survey of 27 energy analysts projected that Brent will average $104.10/bbl in 2014, $4 lower than the 2013 average, and $102.60 in
2015. WTI is forecast to average $97.30/bbl in 2014, just slightly below this
year's average. The main reasons given for the expected price decline are excess supply -- primarily due to booming U.S. tight oil production -- and
subdued demand growth, partly due to an expected easing of quantitative easing
(if you will), aka the dreaded "taper."
The EIA's Annual Energy
Outlook 2014, released this week, forecasts that WTI will average
$98.50 -- basically a continuance of 2013's prices.
I believe the majority of analysts have gotten carried away with
tight oil euphoria and are underestimating global demand growth. If OPEC output
is going to remain subdued, and non-OPEC supply increases less than than the IEA's expected 1.7 mb/d, then spare capacity could fall sufficiently
far to put upward pressure on prices. I also expect the Fed to approach the
"taper" cautiously, and back off from it if they see any indication
that economic growth is slowing.
As for headline risk, analysts generally aren't talking it up
anymore, which in itself is worrisome. After several years of major geopolitical
events that didn't exert strong or long-lasting effects on oil prices, I wonder
if we haven't become too complacent about that factor. But at the moment I
don't see any major risks on the horizon, so headline risk doesn't carry much
weight in my forecast for 2014 either, though I do see increasing risk from
Therefore I am sticking with my
June 2012 call that oil prices will remain bound by the "narrow
ledge," holding Brent prices between $105 and $125 for most of the year.
The actual low for Brent in 2013 was $96.84 and the actual high was $118.90,
but the price was only below $105 for 58 days of the 49 weeks thus far. Generally,
I expect prices to rise and sit more solidly within the "narrow
ledge" range in 2014, with a few possible spikes over $125.
I am also sticking with my forecast that in late 2014/early
2015 the "Goldilocks" period of relatively stable prices we have
enjoyed since 2010 will come to an end, kicking off another phase of volatility
as oil tries to reprice higher to accommodate the rising share of expensive
Therefore, I am breaking with the crowd and forecasting higher,
not lower, oil prices. In 2014, I expect Brent prices to average $112/bbl. For
WTI, my target is $103.
Forecasting natural gas prices, however, continues to be
more guesswork than anything else.
While it's true that "dry" gas
prices still need to be above $4/MMBtu to be truly profitable in the cheapest
plays, and higher still (some say $6 or more) for the majority of U.S. dry gas,
the more-valuable associated natural gas liquids from the "wet" plays
like the Marcellus are still making gas production worthwhile at
sub-$4 prices. While production from the Eagle Ford and Marcellus is still
increasing, dry gas prices could remain at unprofitably low levels. And as we
do not yet know when those growth trends will end, nor have any clear way to
forecast it, I must conclude that gas prices in 2014 will look much the same as
they did in 2013, if not a bit lower.
Spot natural gas has averaged $3.70/MMBtu so far this year,
which feels like a level it could hold for another year. Prices completed their
long climb out of the doldrums this year, and I think the days of ridiculously
cheap gas are behind us now. For the 239 days of available data thus far in 2013,
gas prices never dipped below $3, were under $3.25 for only 11 days, and were
under $3.50 for only 59 days. That's in a year in which the spread between the
high and low was $1.30 -- a huge range, relatively, compared to oil and most
other commodities. I expect the range to be tighter in 2014, but I don't see a reason
to forecast significantly higher or lower gas prices.
Therefore, for lack of a special insight one way or another,
I am forecasting that in 2014, U.S. natural gas prices will stay
exactly where they have been in 2013, at an average $3.70/MMBtu.
With that, I wish you all a restful and peaceful holiday.
Here's to one more year, hopefully, of relative stability in the oil and gas
(Photo: Mr. Muggles/Flickr)
This post was originally published on Smartplanet.com