The oil and gas market is in recovery. But the scale of recovery and for how long the recovery will last remains to be seen. This was the topic of conversation of the Center for Strategic & International Studies (CSIS) event, “The Road to Market Rebalance: Oil & Gas in 2017” held Feb 16.
Frank A. Verrastro, senior vice president and trustee fellow at CSIS, and Adam Sieminski, James R. Schlesinger chair for Energy and Geopolitics at CSIS, contributed to discussion, as president and CEO of RBN Energy Rusty Braziel, managing principal of Petroleum and Alternative Fuels at ESAI Energy LLC Sarah Emerson; and VP of Oil Markets (Midstream and Downstream) at HIS Energy Kurt Barrow gave presentations.
“The rebalance is underway,” Verrastro said in opening. “We’ve learned the hard way that oil prices in excess of $120 don’t work, and prices below $27 don’t work either. So we’ve been looking for this kind of Goldilocks equilibrium.”
All panelists expressed that the market is on the rise. This can, in part, be contributed to OPEC as it decided to cut production. But Emerson warned that if the market is going to continue on the road to recovery, OPEC would have to keep production rates low through the second half of this year. Barrow added that continued success also depends on the new administration and what international policies and actions it would take — be it border taxes or other items. The new administration is good for stimulation in the short term, but leaves uncertainty in the long term, he said.
“The way I’d like you to think about 2017 is as one bright, shining moment,” Emerson said. “OPEC [made] the tough decision to cut output. Product rebalancing started in 2016, crude oil rebalancing is now underway with the OPEC deal.”
But then she added that refining capacity expansions threaten product rebalancing during and after 2018. Barrow talked more in-depth on the subject of refining, and he says he senses some changes down the road.
“After a period of volatile oil prices and rapidly shifting product demand and crude supply, a globalization of refining is creating a period of increased competition, and further disruptions are on the horizon,” he said.
Nonetheless, Braziel said that the mood in his hometown of Houston is pretty positive. His presentation showed that rig count in the U.S. is up: oil is at 591 and gas is at 149. Braziel said the number of rigs could be at 1,000 by the end of 2017. This positive outlook is dramatically different than that of 2016.
“What a difference a year does make,” Braziel said. “[Last February] everything was collapsing. Crude oil prices were $30.66 that day; four days prior they had been $26.21. Producers were staring into the abyss, and nobody knew what was going to happen. Rig count was falling to a level we hadn’t seen in 30 years.”
But looking back an additional year, the outlook does not look so cheery.
“Back in 2015 would we have called this [crude oil thing] a recovery?” Braziel asked. “Absolutely not. We would have called it a meltdown, a catastrophe.”
In this “recovery” stage, crude oil prices in 2017 are nearly $50 less than they were in 2013. But, Braziel showed prices are up from 2016 by some $10. The story is similar for gas. Prices are only part of the story — an essential aspect that all panelists touched on.
Braziel mentioned four other factors: larger leaseholds, longer laterals, extra sand and more choking. These factors yield “the rise of the decline curve,” as he put it — producers are seeing a reduction in decline in production rates after initial production. They are also the factors that Braziel said is changing the market right now.
The oil and gas market is on the rise, but there are also several variables. The forecasts the panelists showed displayed a positive number in terms of demand. However, no forecast can claim to be certain.
“’Surprises’ might be the word of the year,” Sieminski said. “Here’s the problem: we don’t know whether those are positive or negative.”
