The oil and gas sector had a bumpy landing at the end of 2018. Prices fell as markets reacted to a perceived oversupply of oil and the potential for a deteriorating global economy.
A month and a half into 2019, some key indicators show cause for optimism.
Hedge fund managers have become increasingly more bullish on oil prices in recent weeks as market fundamentals favor stronger prices, according to Reuters market analyst John Kemp.
Saudi Arabia’s willingness to cut output and play “swing producer” coupled with sanctions on Venezuela and Iran have created confidence prompting hedge funds and other money managers to become net buyers of 32 million barrels of Brent crude oil futures and options during the week of February 22, he noted.
Petroleum markets are also increasingly optimistic about the potential for a trade deal between the U.S. and China, a factor that has been a drag on markets due to the ongoing uncertainty and the potential for a resulting economic downturn. The potential for a slow-down in China and the U.K. is still factoring into prices, but there is clearly more optimism than there was at the end of 2018.
That optimism is impacting exploration budgets, according to Rystad Energy, which cited improved market conditions and lower well costs as primary drivers for greater exploration spending in 2019.
Rystad, along with other forecasters, believe that exploration activity will increase in 2019 across the globe, both onshore and offshore, as oil and gas producers begin to drill in areas where they have held off in recent years. At the same time, US producers are now focusing on producing basins outside the Permian, as economics improves along with efficiencies achieved from enhanced techniques.
Exploration and production on U.S. federal lands is also expected to increase in the coming months and years, in part due to the Trump administration’s willingness to make those lands available. In 2018, the Interior Department set an all-time record for oil and gas leasing on federal lands.
It generated more than $1.1 billion from lease sales, almost triple the previous record set in 2008. Over the past decade there has been waning interest in oil and gas exploration on federal lands due to the lack of acreage available, length of time for obtaining permits and the allure of shale plays that are predominantly on private lands. The current administration has reduced that trend, offering more acreage and reducing the average weight times for Bureau of Land Management-issued permits from 10 months to four months.
The trends are making an impact. Last year Texas produced an all-time high 1.54 billion barrels of crude oil, shattering the previous record set in 1973. It also produced 8.8 trillion cubic feet of natural gas.
At the same time, big developments continue to take place on the energy export front. On February 5, Golden Pass Products, LLC, a joint venture between ExxonMobil and Qatar Petroleum, announced that they were moving forward with a $10 billion LNG export project in Sabine Pass, Texas. Golden Pass, currently an LNG import receiving facility, will add liquefaction/export capabilities that will enable it to export about 16 million tons of LNG per year.
On the crude oil export front, about 10 projects have been announced to build deepwater crude oil export terminals off the coast of Texas and Louisiana.
While it is not likely that they will all get built, the willingness to invest that much capital in these projects demonstrates that the market believes in the long-term viability of U.S. crude exports and energy production.
As further verification of the opportunity, Indian Oil Corp, India’s top refiner, signed its first year-long deal to buy U.S. oil, paying $1.5 billion for 60,000 barrels per day through March 2020.
The positive indicators just keep coming.
Jack Belcher is senior vice president of Cornerstone Energy Solutions and advises energy, transportation and financial services clients on government relations, regulatory affairs, risk management, ESG management, coalition building and stakeholder relations. He is also managing director of the National Ocean Policy Coalition.
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