When will oil recover? Feds say not this year

By Jenny Mandel | 01/14/2016 07:37 AM EST

After months of forecasting a runup in oil prices later this year, federal forecasters have downgraded their assessment to reflect gloom for the oil and gas industry throughout 2016 and well into 2017.

The U.S. Energy Information Administration’s latest forecast, the first to look into next year, predicts that it will be late in 2017 before world supply and demand start to rebalance, with the first drawdowns from global inventories predicted for the third quarter of next year.

This year has seen world stocks increase by 1.9 million barrels per day, their second consecutive year of growth, with the oversupply a major factor in oil prices reaching the lowest monthly average since mid-2004, well before the advent of the domestic shale boom.

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Brent crude, a benchmark for international prices, lost nearly half of its value last year, falling from an average $99 per barrel in 2014 to $52 per barrel last year, according to EIA data. The agency predicts Brent prices will average $40 per barrel in 2016 — up somewhat from the $30 price point it has hovered near this week — and $50 per barrel in 2017, with most of that price recovery concentrated late next year.

EIA predicts the domestic benchmark, West Texas Intermediate, will average $2 per barrel lower than Brent this year and $3 per barrel lower in 2017, reflecting a narrower gap than the previously forecast $5-per-barrel discount for 2016.

In accounting for the change, the agency points not to the December lifting of the crude export ban — a policy development that advocates said would reduce the discount for U.S. crude — but to economics and logistics around U.S. and world oil storage capacities.

EIA’s lower price predictions are in line with those of other analysts who see hard times for the oil industry. Goldman Sachs recently suggested oil would bottom out at $20 per barrel, while repeated stock sell-offs in China over the past few weeks have sent ripples through the financial world, with particular ramifications for energy and other commodities (EnergyWire, Jan. 8).

For U.S. industry, EIA echoed the dire warnings of other analysts: "The expectation of reduced cash flows in 2016 and 2017 has prompted many companies to scale back investment programs, deferring major new undertakings until a sustained price recovery occurs. The prospect of higher interest rates and tougher lending conditions will likely limit the availability of capital for many smaller producers, giving rise to distressed asset sales and consolidation of acreage holdings by more financially sound firms," the agency said.

As a result, onshore oil-directed rigs and well completions are expected to continue to fall this year and next, forecasters warned, with Texas’ Permian Basin the lone play where production will continue to grow. The agency also expects production to expand in the offshore Gulf of Mexico, where long-running investments continue to play out.

In a briefing with reporters Tuesday, EIA Administrator Adam Sieminski looked toward an eventual recovery of oil prices to more sustainable levels. "We’ll see a recovery, but there’s a lot of pain involved in this," he said of the near-term picture.

EIA’s forecast suggests that the country’s net oil imports will remain relatively low in 2016, at 24 percent, about on par with the early 1970s. But production cutbacks will start to drive up imports next year for the first increase since 2005, its analysis suggests.

For consumers, the weak oil market translates to fuel savings. EIA analysts predict that gasoline will average $2.03 per gallon nationwide this year and $2.21 per gallon next year, down from $2.43 per gallon last year. Households that rely on heating oil are expected to shave an average of $763 off their winter heating bills to spend $1,088 for the season, while households relying on propane will pay 24 percent less in the Northeast and 31 percent less in the Midwest this winter due to a combination of warmer weather and lower fuel costs.

The exception: petrochemicals

Federal forecasters noted one exception to the otherwise grim oil outlook over the next two years, in the hydrocarbon gas liquids (HGL) sector.

EIA forecasts that domestic consumption of HGLs — a category that includes both natural gas liquids like propane and ethane, as well as products like ethylene, propylene, butylene and isobutylene that are derived from oil and gas processing plants — will jump over the next two years.

From a base of just over 3.5 million barrels per day of domestic HGL consumption, markets are expected to expand by 10,000 barrels per day this year and by 130,000 barrels per day next year, mainly from the startup of six new ethane-fed petrochemical plants. Net HGL exports are also poised to grow, expanding from an estimated level of 840,000 barrels per day in 2015 to 1.3 million barrels per day in 2017 with the launch of new export terminal capacity, EIA said.

Natural gas markets, meanwhile, will continue to putter along near today’s low pricing, EIA expects. The agency forecasts that after averaging $2.63 per million British thermal units (MMBtu) in 2015, the domestic Henry Hub index will tick up to $2.65 per MMBtu in 2016 before climbing to $3.22 per MMBtu in 2017.

Natural gas storage is well above typical levels for this time of year, with the Jan. 1 working inventory of 3,643 billion cubic feet (Bcf) 15 percent above the five-year average. But industrial demand will likely absorb much of the excess, as new projects drive industrial demand up 3.5 percent this year and 2.5 percent more the following year, EIA predicts.

Natural gas exports will also figure into the supply-demand balance starting this year when Cheniere Energy Inc.’s Sabine Pass terminal ships its inaugural export cargo. EIA sees the plant sending out 0.7 Bcf per day this year, ramping up to 1.4 Bcf per day in 2017 (EnergyWire, Dec. 15, 2015).

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