The last quarter in 2016 was a good one for energy prices. On September 30th, the February 2017 WTI and Henry Hub contracts settled at 49.49 USD/bbl and 3.30 USD/MMBtu, respectively. On December 30th, they settled at 53.72 USD/bbl and 3.72 USD/MMBtu. That’s 9% and 13% higher on the quarter, respectively, with gas prices boosted by this year’s winter weather. Looking back at the whole year, the WTI prompt month price is 45% higher than at the end of 2015 and the Henry Hub prompt price is up 59%.
The biggest news of the quarter was OPEC’s largely unexpected agreement to reduce output by about 1.2 million barrels per day by January with the stated goal of “inventory normalization.” This produced a sharp rally in oil prices – over 9% in one day – and triggered some US shale company share prices to rise by more than 30%. The deal included Iraq’s first quotas since the 1990s, a 3.8-million-barrel-per-day cap on Iran’s recovering production, Saudi output cuts of half a million barrels per day, and cuts to UAE and Kuwait production. Perhaps most surprisingly, Russia, not an OPEC member but often present at OPEC negotiations, agreed to cuts of its own as part of the agreement.
Assuming they hold to the agreement, was this the right move for OPEC? Some argue that it will reward shale companies with higher profits to go with their newfound efficiency improvements. Others say OPEC should have held out longer before even discussing cuts in order to allow more US companies to go bankrupt, since capital markets proved much more flexible in keeping these companies afloat during difficult times than most expected. Another viewpoint is that OPEC simply ran out of time and had no choice, since the cartel members’ own national budgets require higher prices to remain comfortably operational.
North American natural gas prices have risen sharply in response to weather that’s been colder than anticipated and stable-to-slightly-declining production. While there still remain delivery-related challenges for many producing regions around the continent, including Western Canada, all regions are enjoying substantially higher prices than this time last year as well as an improved forward outlook. Alberta gas demand has been at record levels this year and US storage levels are now below both last year’s levels and their 5-year average.
LNG prices were low in 2016 as the markets have come to terms with the global supply glut. There is, however, reason for optimism as a global need for more energy and a desire for more diversification of energy sources indicates healthy demand growth lies ahead. Both Europe and, especially, Asia look like solid growth markets for LNG going forward.
Despite the eventful recent months, our commodity price forecast looks a lot like it did last quarter. OPEC’s agreement was certainly very welcome news to producers around the globe, and the confirmation of what most expected – that at some point within the next year or two, OPEC would once again play the quota game to temper output – is indeed more comforting as a certainty than an expectation. While some tweaks were made, we still forecast Brent and WTI crude to spend 2017 between 50 and 60 USD/bbl and eventually climb to 70-75 USD/bbl (in today’s dollars) in the long term.
Our forecasts for all North American natural gas benchmarks have increased for 2017, but we continue to believe the vast shale supply will keep prices from going too far in a sustainable way even in an environment of increasing demand. Following the increase to our 2017 forecast, we are more or less maintaining our previous forecasts for North American natural gas prices in the medium and long term.
Given the US Dollar’s strength, even in the midst of resource price recoveries and even firmer expectations that the US may diverge from most of the rest of the developed world in interest rate policy, we have adjusted our exchange rate forecasts across the board. Although we now expect it to happen one year later than we previously did, we still forecast the Loonie to climb to 0.85 USD alongside a further gradual oil price recovery in the coming years.
Tyler Schlosser is GLJ Petroleum Consultants’ Director of Economics and Risk. Tyler is responsible for generating GLJ’s commodity price forecasts and modeling fiscal regimes across a broad range of international jurisdictions.