On March 29, 2016, we attended the Hart Energy Oil and Gas Investor Energy Capital Conference in Austin, Texas, where Executives from E&P companies, financial institutions and private equity firms “spent two days networking, strategizing and hearing from some of the industry’s top experts.”The presentations were all very enlightening, and provoked a lot of energetic and thoughtful discussion.
In particular, the lead-off presentation by S. Will VanLoh at Quantum Energy Partners wove together a number of the larger themes that we’ve been looking at during the past couple of years of activity, and I thought I would use his 7 Market Themes as a springboard for discussion here on the blog. So lets.
1 This downturn is supply driven, like the 80’s downturn, but with much less OPEC spare capacity
We have spent some time discussing the current global inventory levels – the ~1 MBOE/day or so surplus of crude available to the market. We have also discussed from early on the differences amongst OPEC member countries as to whether they’re willing or able to provide a supply cap for stabilization. However, I think Mr. VanLoh’s point about OPEC spare capacity is quite interesting.
Image Source: Quantum presentation at ECC
2 Technology will continue to drive down costs, increase recoveries and thus lower break‐evens
This has certainly been explored – we see that even at the much lower drilling rates US Onshore costs are coming down – some at the hands of lower service rates – but certainly a lot of improvement in planning and executing wells for maximum ROI. (There is a case to be made for the focus on sweet spots as well.)
3 Domestic and global product inventories are at all time highs and will keep a lid on prices even as production rolls over.
4 Additionally, DUC well inventory will also keep a lid on prices for a period of time
Yes and Yes. Though the global demand for energy continues to grow (with the current low cost of hydrocarbons further encouraging future petro-dominance), it will take a while for supply and demand to level out the current surplus of inventory. This fact, coupled with an awareness of the defacto in-ground storage volume of DUCs in the US, will likely keep the price from rallying too dramatically.
5 OPEC, and more specifically Saudi Arabia, holds the keys to understanding how long this downturn can last
Though Iran’s newly available (or at least newly legally available) production supply may be moving the headlines at the moment, it’s pretty clear that Saudi Arabia’s loss-leadership is costing them a lot of cash, and at some point even they will need to instrument a certain break-even to provide for their own long-term future.
6 Emerging market oil consumption trends are the biggest long term driver of oil prices
Yes. Despite some amount of concern over a sluggish economic outlook in China, they are importing crude oil at record levels. Also, the removal of subsidies has resulted in a sharp expansion of demand for oil in India.
7 LNG exports and power demand are the biggest long term drivers of gas prices
The dream of export-ready LNG on the Gulf and East Coast is rapidly becoming a reality. Again, the Asian market is the biggest driver. The (almost finished) expansion of the Panama canal, and the possibility of the Kra Canal should further ease access to those markets. The European LNG market is also seeking some amount of stability in supply given the unstable aspects of business dealings with Russia.
What do you think? Leave a comment below.
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