Five Energy Predictions For 2017
I read an article this morning where one analyst predicted that we are in a 10-15 year bear market for oil. The analyst stated that the market is oversupplied by about a million barrels per day (it isn’t — see the charts in today’s article), that shale oil production will surge this year (it won’t), and that the OPEC agreement to cut production would fall apart (it won’t). His projection was that we will spend 2017 below $50 per barrel (bbl) and in 2018 prices will be back below $40/bbl.
I disagree with this assessment. I believe we will look back in a few years at 2016 as the year the energy sector recovery got underway in earnest. I believe 2017 continues the recovery. Today, I explain how I see the energy markets shaping up this year, in the context of my 2017 predictions.
1. Crude oil will flow through the Dakota Access Pipeline (DAPL) in 2017.
Donald Trump’s surprise win in the 2016 presidential election will result in big changes in U.S. energy policy. One immediate impact will be in the support at the federal level for oil and gas pipelines. The Obama Administration implicitly encouraged opposition to high profile projects like the Keystone XL Pipeline, and more recently the Dakota Access Pipeline (DAPL). Decisions on these projects came down on the side of pipeline protesters.
With Trump in office, DAPL will be completed and oil will flow. The only real uncertainty in my mind over this prediction is that Trump comes into office pretty disorganized, and President Obama has put a lot of obstacles in front of him. He will have a lot of competing priorities, and there will be legal challenges. Those will take some time to sort out. Nevertheless, I expect the pipeline to be completed and the oil to flow this year, much to the chagrin of pipeline protesters.
2. The price of WTI will average at least $15 per barrel higher than in 2016
I feel compelled to make an oil price prediction, but this year is much more difficult than a year ago, when I was confident that there would be a strong move upward from $30/bbl. This year I think oil prices will continue to move up, but a lot of optimistic expectations are already factored into the price.
According to data from the Energy Information Administration (EIA), the average closing price for West Texas Intermediate Crude (WTI) in 2016 was $43.31. During the year, the price closed as low as $26.19 and as high as $54.01. The EIA’s most recent Short Term Energy Outlook projects Brent Crude prices to average $51.66 and WTI Crude prices to average $50.66 this year, but some are predicting a return to $40 or lower in 2017.
As I write this, WTI is trading at $50.81 and Brent is $53.62. This prediction will require the price of WTI to average at least $58.31 for the year, which is an average that is 15 percent above the current price, and also currently above the futures price of every contract trading in 2017. This prediction is essentially a bet that the OPEC production cuts will largely hold, which will minimize the risk of a strong downside move. However, there are headwinds to the upside. Even now the U.S. rig count is increasing, and while it is still only a third of the highs of 2014, it is up 60 percent since summer and will continue to rise alongside oil prices.
Crude oil inventories are still high, but the International Energy Agency’s most recent Oil Market Report showed that they were trending down even before the OPEC announcement to cut production:
Source: International Energy Agency
It is certainly true that two years ago there were a couple million barrels per day (bpd) of oversupply, but falling U.S. shale oil production and another year that added >1 million bpd of demand had roughly balanced the market in the 2nd half of the year:
Source: International Energy Agency
As a result, I think this will be a less volatile year for oil, with dampers on the high as well as low side. We should reach $60, and I think OPEC is targeting at least that level. But it is hard to convincingly argue that the annual average will go that high (admittedly even $58.31 is a stretch for a yearly average) considering the current price, the fact that global crude inventories are still extremely high, and the expected increase in U.S. shale oil production.
This is a prediction that hinges on many factors, which makes it all the more difficult. If by the second quarter it is clear that global crude inventories are coming down rapidly, then I think we will see a $60 average for WTI for the year. However, if we see the OPEC agreement start to fall apart, we will likely retreat back to the $40s temporarily. So while some may not consider this an extremely aggressive prediction, it is a difficult forecast that could look silly in hindsight depending on how events play out.
3. The average Henry Hub spot price for natural gas will be above $3.50/MMBtu
In 2016 the average spot price of Henry Hub natural gas was $2.52 per million British thermal units (MMBtu). But by year-end the price was surging in response to depleting inventories. At present the forward price curve for natural gas in 2017 ranges from about $3.13 per MMBtu up to about $3.37, before falling back below $3 in early 2018. This seems too low given the strong demand growth coming online from new petrochemical projects, the utility sector, liquefied natural gas exports and growing pipeline exports to Mexico. Demand has been growing for years, but production growth has kept pace, keeping prices depressed. Natural gas production stalled in 2016 in response to low prices, and although I think it will bounce back this year I think demand will get the upper hand.
The weather always has a strong influence on gas prices, but unless there is an extended bout of mild weather it will be hard to keep natural gas prices near current levels. I believe natural gas has more upside than oil in 2017, and that the average closing Henry Hub spot price will be above $3.50 for the year.
4. U.S. oil output will offset less than a quarter of the announced OPEC production cuts