We work in an energy industry that, with each passing moment, is becoming more and more interesting. “Living in interesting times” is often alluded to as a traditional Chinese curse generally referring to existing with disorder and change. Changes are rampant throughout the energy industry, be it recent advances in technology, the global power struggle over market share, or newly emerging markets which may disrupt the industry as a whole. In 2018, we appear to be living in increasingly “interesting times”.
Recent shifts in global markets have increased the need for producing nations to unify their efforts to keep market share. Current examples include OPEC working alongside Russia to hold off American growth in the world oil market and more recently, the news of Russia and Saudi Arabia in talks for a deal to control oil supplies for up to 20 years. Interesting times, indeed, considering these two countries back opposing sides of the ongoing conflict in Syria. And what implications does an Aramco IPO (or lack thereof) have on market trends going forward? Some would argue that if an IPO is in fact on the table in the next year or two, Saudi Arabia may be unwilling to decrease the price of oil in hopes of receiving a higher premium on the shares they offer on the market.
In North America, the increase in oil production created by newer fracking and completion technologies has led to an abundant domestic supply which has demonstrably converted the US from a net energy importer to an exporter. This trend is not expected to change with current WTI prices, appearing to have stabilized for now around the $60-$70 USD/bbl range; at or above the top end of the marginal price needed to cover expenses of most US oil plays (see chart).
We are also witnessing a clear shift towards natural gas as a primary supply for the world’s growing energy demands. This shift is expected to accelerate over the next few decades, creating the need for a more interconnected world natural gas market. Currently there is a race between producing nations to position themselves to best take advantage of this growing market by approving and building pipelines and LNG facilities. Fortunately, Canada has a large amount of natural gas reserves and our industry has been poised to take advantage of this increasingly important market; predicated on our ability to overcome challenges related to a lack of infrastructure and uncertain regulatory processes, we may see our opportunities shrinking as the growing world demand is met by other producing countries.
On top of these changes within the energy industry, there are political factors that change how countries deal and trade with each other as well as risks posed by emerging technologies. Both of these factors have the potential to make large impacts on the industry as a whole - with lasting effects. Overall, these increasingly “interesting times” create inherant variablilty that can cause enduring changes overnight. With this in mind, there may be pronounced swings more frequently as the industry tries to find a balance in the new reality that is our world energy market.
In GLJ’s April 1st, 2018 price forecast, the largest change was related to the recent increase in oil price over the past few months. WTI and Brent forecasts were increased to reflect current trends and long-term, were increased to 67.50 USD/bbl and 70 USD/bbl respectivly in real 2018 dollars. Natural gas benchmarks were revised modestly to reflect recent pricing changes while also keeping in line with general market trends in the long term. Our Henry Hub gas price forecast remains at 3.50 USD.MMBtu, in real 2018 dollars.
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