One more year of relative oil and gas stability before the storm?

Chris Nelder on SmartPlanet: “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 unchanged.
….As of this writing, with 49 weeks of data available for 2013, Brent 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.
Demand in 2014: ….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 to Bloomberg.
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. (A good account of Dave Hughes and Mark Lewis’s presentations features here).
Conclusion for 2014: ….I believe the majority of analysts have gotten carried away with the U.S. 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 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 unconventional oil.
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.
….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.
….Here’s to one more year, hopefully, of relative stability in the oil and gas sector.”