Crude Oil Analysts: ‘Rebound’ Coming For Oil And Gas Paul Hart Editor-In-Chief, Midstream Business Hart Energy Thursday, March 23, 2017 - 9:26am Log in to post comments Email this page 2 John Paisie, executive vice president, Stratas Advisors, speaks to oil and gas executives at an earlier Stratas Advisors breakfast in Houston. Source: Hart Energy MIDLAND, Texas—Economic indicators point to a near-term uptick in the oil and gas business after a long and painful downturn, Stratas Advisors researchers told a Midland, Texas, audience March 22.“We are poised for a rebound,” John Paisie, executive vice president of Hart Energy’s research arm, said in his presentation to the 2017 Permian Basin Outlook Breakfast at the Midland Country Club. There are positive trends, such as Europe’s improving economy and a counterbalance of lingering oversupplies. “We will have a production-demand crossover as the world market rebalances,” Paisie added.Joining Paisie in the wide-ranging presentation were Greg Haas, Stratas’ director of integrated oil and gas, and Richard Mason, chief technical director for Hart Energy.Paisie gave a macro view of the industry and how it relates to world and national economies, while Haas focused on midstream and downstream trends—primarily in the Permian. Mason discussed upstream sector trends within the big play, such as drilling, completions and service and supply costs.Paisie emphasized the importance of viewing the oil and gas business as part of the worldwide economic system. “If you don’t understand the macro factors, then you can’t understand what’s happening in energy,” he said. “That will enable you to maximize the upside and mitigate the downside.”He discussed Stratas’ methodology and noted that, at a similar breakfast in Houston held in January 2016, he projected crude oil prices would rise to $40 per barrel (bbl) by the end of that year.Given that the Brent benchmark stood at $26/bbl at the time, “we made a pretty bold prediction,” he added. “But it ended up a good call; our forecast went pretty well.”At the Midland event, Paisie outlined several reasons for an oil price rebound in the next year, including China’s strong economy and a shift in that nation’s economic emphasis to consumer goods and away from heavy industry. Also, the U.S. economy continues to improve, along with Europe’s, while Iran’s return to the world oil markets brought lower production levels than most economists had projected. OPEC’s production curbs also have helped bring the worldwide crude oversupply into check.The recent crude price dip is due to lingering oversupply and crude traders moving into long positions. “The sentiment has changed and has become more bearish,” Paisie said, but he projected, despite multiple moving parts of the global economy, better commodity prices are ahead.Brent prices could move as high at $68/bbl, while the Stratas base case projects Brent at $60/bbl. The U.S. West Texas Intermediate benchmark, in that base case, would likely fall in the $55/bbl to $58/bbl range. Paisie admitted Stratas “is somewhat bullish” in comparison to other current commodity price projections.Midstream OutlookHaas opened his presentation by emphasizing just how important the Permian has become in the world’s oil and gas industry.“The Permian is the driver of liquid supply growth,” he said, adding, “We [U.S. producers] are getting back to where we were, thanks to the Permian Basin.”The basin’s crude production has climbed by 1 MMbbl/d and continues to rise, he said, with a compound annual growth rate (CAGR) of 8.1%. The midstream is responding to that increase with new pipeline capacity, which Haas projected will have a 9.4% CAGR, “so we will get ahead a little in the game.” The pipelines “will have to run fast to stay in place, so keep putting out those open seasons.”Turning to his own macro view, Haas noted Permian producers will be competing with the completed Dakota Access Pipeline starting this year, which will be moving Bakken crude to the Midwest and Gulf Coast, while it’s likely the shelved Keystone XL Pipeline will be built to move Canadian crude to the Gulf. Put all of that supply together, plus sales from the federal Strategic Petroleum Reserve, “and we are the United States of excess right now,” Haas added with a chuckle.Growing exports will have an important role in working off the excess supply, he noted. Exports will help right the growing mismatch between production of light, sweet crudes from the shale plays while much of the nation’s refining capacity has been built to run imported heavy, sour crudes. He noted refiners’ crack spreads are down but remain at a respectable $9/bbl.Natural gas is another matter for Permian producers, Haas said, because “we still have growing production from the Beast of the East—the Marcellus and Utica—that is really driving natural gas production now.” As with crude, gas exports will be key, he added. Exports to Canada are down because Canadian gas is discounted even more than U.S.-produced gas. However, exports to Mexico and LNG volumes will continue to grow.U.S. petrochemical plants are strongly favored now due to rising NGL production from the shale plays—as well as discounted gas that can cheaply fuel the nation’s growing cracking capacity.“U.S. petrochemical producers are sitting in the catbird seat” as a result, he said. NGL exports have been strong and will continue to grow, especially propane, Haas said.Upstream TrendsPermian producers and service companies have weathered “a downturn like no other,” Mason told the breakfast. Industry observers have questioned whether the turnaround from the downturn that started in late 2014 would be U-shaped or V-shaped. Rather, Mason said “it will be likely the turnaround will be more of a W because of a continued oscillation in the market.”But regardless of peaks and valleys, he seconded the remarks by Haas and Paisie that “the Permian is leading us off the bottom; this is the most active market on the globe.”Producers continue to high-grade their acreage, drilling the most prospective locations with longer laterals, more stages and more frack sand. The improving drilling statistics will level off at some point, Mason said, but the Permian energy industry enjoys a substantial technological edge today “and all of that happened with $40 and $50 oil,” noting that “we’re testing the limits of high-intensity completions.”He discussed separately the various sectors of the Permian’s upstream, calling the workover business “the most challenged sector out there.” Multiple bankruptcies thinned the ranks of workover outfits, “but the equipment is still there and bankruptcies didn’t solve the problem of overcapacity.”Meanwhile, “high-specification rigs are already in tight supply,” he said, as regional drilling picks up. Large drilling contractors weathered the downturn the best since much of their work is done through long-term contracts. He noted drillers are moving rigs into the Permian from other plays now since it remains the most active region in the country.“We’re at a critical juncture in the recovery,” Mason said. Prices charged by service and supply companies need to be low enough to attract E&P firms to drill, yet “service providers need to make enough money to be profitable.”Paul Hart can be reached at firstname.lastname@example.org.