The biggest news in the energy industry over the past few months has revolved around the OPEC (and non-OPEC) production cuts. Whether the May 25th agreement to extend existing supply cuts into 2018 will impact the market on a macro scale is yet to be seen. Many analysts share the opinion that these cuts aren’t enough, but in a broad sense there probably hasn’t been enough time to tell if they will move the market in a meaningful way. The reality is that these market changes can’t be expected to occur within a few months, or even quarters. The truth of the matter is that the world’s oil and gas markets are very complex systems with endless moving parts that are incredibly difficult to predict in the short-term with any real sense of certainty.
In November of last year, 11 of the 14 OPEC countries, along with a group of 10 non-OPEC countries, agreed to cut production by a total of almost 1.8 million barrels a day from October’s levels to try to remedy the current global supply glut. This agreement was recently extended into early 2018. Though not all countries have met their individual targets, total cuts are being made up for in large part by Saudi Arabia. As of May 2017, overall reductions in production have been achieved. Despite these cuts being achieved over a month ago, current storage levels are still at some of the highest levels in recent history which contributes to the excess supply within the market. Complicating things further, countries including the US, Libya and Nigeria that were not involved in the production cutting agreement have recently boosted production, making up for the production cuts. How long these nations not included in the agreement can sustain these production increases at current prices is uncertain. These recent cuts to production will likely increase long-term prices, the question now is how long will it take for the market to be impacted.
Shifting focus over to natural gas: prices have been consistent over the past few months, increasing with demand trends before declining over the last few weeks of the quarter, bringing them back in line with where they started the quarter. Total gas storage levels have narrowed the gap between average trends and current levels, which improves the outlook for sustained gas prices into the summer. Summertime maintenance operations/shutdowns throughout the gas distribution system will take some production offline, creating some short-term upward pressures on prices. In the long-term, natural gas prices look poised to increase as gas continues to grow its share of the global energy mix – rising at a pace of 2% per year over the next 4 years, according to the IEA.
Other than continued lower prices, we have not seen anything major in market news that would create any large swings in our current forecast. Even with OPEC meeting its production cut targets, there is still an excess of oil in storage that needs to be depleted before prices will begin to increase meaningfully. While reductions to our oil price forecasts were made, WTI prices are anticipated to stay close to 50 USD/bbl for the remainder of 2017, increasing to 68 USD/bbl (real) in the long term, with Brent prices being forecasted at a premium to WTI of 2.50 to 3.00 USD/bbl.
Our North American gas benchmark forecasts were reduced again in the near-term, based on trends seen in current forward contracts. The long-term Henry Hub forecast has been revised only slightly; down 0.05 USD/MMBtu to 3.70 USD/MMBtu (real). Our forecast for national balancing point (NBP) gas was also reduced in the short-term, but is set to increase to previously forecasted levels by 2019.
Currency exchange rates remained relatively unchanged from our Q2 forecast in terms of the Canadian dollar, which is expected to increase in relative strength to the greenback, returning to 0.85 alongside the gradual recoveries of oil and gas prices. The Euro and the British pound both gained traction on the US Dollar over the past quarter, which is reflected in our forecast.
Though this forecast is slightly down overall from our Q2 forecast, there are beams of optimism appearing throughout the industry as activity begins to gear up after being suppressed over the past few years. It has been quite some time in the making but the OPEC production cuts, coinciding with recent downward trends in storage levels, may prove to be the turning point for oil prices in the medium to long-term.
Justin Mogck is a Professional Engineer at GLJ Petroleum Consultants’ who focuses on commodity price forecasting, energy market analysis and corporate evaluations