American Oil and Gas Reporter - January 2017 - 59

Outlook 2017
foot-a-day increase in winter demand.
EIA, which leans to the high side in
its December Short-Term Energy Outlook
at an average 2017 Henry Hub spot price
of $3.37 an Mcf, explains, "Although
temperatures from December 2016 through
March 2017 are projected to average 3
percent warmer than normal, this forecast
is 13 percent colder than the same period
last year. This expectation . . . contributes
to EIA's projection of a 13 percent yearover-year increase in residential and commercial natural gas consumption. Total
natural gas consumption for December
through March is forecast to be 4 percent
higher than last winter."
Price Movement
AOGR asks operators what crude oil
and natural gas prices would prompt them
to increase their 2017 drilling plans. Sixty
dollars begins to move that needle. At
$60 a barrel, 38 percent of survey respondents say they would drill more
wells. That number climbs to 57 percent
at $65 a barrel (Figure 4A), and reaches

79 percent at $70.
Evercore ISI asked a similar question
in its 2017 Global E&P Spending Outlook.
At $55 a barrel, 19 percent of respondents
told Evercore they would increase capex,
while another 36 percent (55 percent cumulative) would do so at a $55-$60 price
range. At $60-$65 a barrel, 77 percent of
Evercore's respondents would increase
drilling, rising to 99 percent at greater
than $65 a barrel.
For natural gas, 31 percent of respondents to the Survey of Independent Operators would increase drilling at $3.50
gas prices (Figure 4B). That percentage
goes to 51 at $4.00 gas and to 77 at
$5.00 gas.
In the Evercore survey, 13 percent of
respondents say they would increase
capex at a gas price range of $3.00-$3.35.
Another 40 percent would spend more at
$3.35-$3.50 gas, 37 percent (90 percent
cumulative) go up at $3.50-$4.00, and
the remaining 10 percent would increase
capex at gas prices above $4.00.
On the flip side, 25 percent of re-

spondents to AOGR's Survey of Independent Operators say they would reduce
drilling at $50-a-barrel oil. That rises to
40 percent at $45 a barrel and 68 percent
at $40 a barrel. At $35 oil, 94 percent of
survey respondents would drill fewer
wells.
For natural gas, AOGR's survey found
23 percent of respondents would reduce
drilling at a price of $2.75 an Mcf. Those
numbers go to 36 percent at $2.50, 52
percent at $2.25, 65 percent at $2.00, 68
percent at $1.75, and 82 percent at $1.50.
Evercore is less detailed on the effects
of falling prices, but does point out that
the average price for 2017 spending to
decrease is $40 WTI and $2.23 natural
gas. The firm adds, "Just about 5 percent
of respondents cite a $45-$50 WTI price
range for cutting capex, while 68 percent
would cut if WTI fell below $40-an unlikely scenario in our view.
"The risk of gas-directed capex cuts
also appears unlikely with just 17 percent
of respondents cutting in the $2.50-$3.00
range," Evercore reports.
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OPEC Agreement Portends Higher Prices
It's anyone's guess how closely individual countries will comply with the
production cuts agreed to by the Organization of Petroleum Exporting Countries
at its Nov. 30 annual meeting in Vienna.
But even partial success likely will have
a big impact on crude oil markets, suggests an analysis by Raymond James &
Associates Inc.
In an industry brief published a few
days after OPEC's announcement, Raymond James estimates the 1.2 million
barrels a day pledged by OPEC as well
as the additional 600,000 bbl/d promised
by non-OPEC exporters eventually will
result in a "real" 900,000 bbl/d reduction
in global oil supply during the first half
of 2017.
"Before the deal," Raymond James
says, "we were looking at modest global
crude inventory builds in the first half
of 2017. Now we are projecting draws
averaging 780,000 bbl/d for the same
time frame.
"For full-year 2017, our previous estimate was for global oil inventory draws
of 360,000 bbl/d," Raymond James adds.

"Our new estimate is for draws of 800,000
bbl/d, more than two times greater."
The firm explains that this should
begin pushing the "normalized days of
supply" in world crude oil inventories
toward the 30-day supply that it sees as
the balancing point between an oversupplied and undersupplied market.
"While days of supply are likely to
remain above 30 for the first half of 2017,
oil inventories within the Organization
for Economic Cooperation and Development should drop under the 30-day threshold in the second half of 2017," Raymond
James calculates. "In anticipation of these
falling inventories, we think the market
will drive oil prices higher early in 2017.
Assuming this is correct, the $53 a barrel
WTI oil futures strip (as of Dec. 5) for
2017 is much too low."
Incentive To Cut
Kent Moors, who directs the Energy
Policy Research Group at Duquesne University, in his e-letter, Oil & Energy Investor, offers some thoughts on why two
key players may have some extra moti-

vation to honor their production pledges.
First, he notes that Saudi Arabia plans
to use money from its announced sale
of a minority share in Saudi Aramco to
fund its post-oil investment and economic
diversification plan. And Russian oil
giant Rosneft already has 25 percent of
its shares in private hands, Moors points
out, while "selling more is in the works
to plug Russia's budget deficit."
"That means Rosneft's management
has to contend with returning share
value to investors, not just projecting
central government policy," Moors writes.
"The Saudis will face a similar challenge
once Aramco shares are sold.
"In both cases, the value of the stock
offers will be set by the value of the underlying assets," Moors reasons. "That,
essentially, is predicated on the price of
oil."
Which leads Moors to this conclusion:
"Both Saudi Arabia and Russia need
still higher oil prices. That may just be
enough to keep the Vienna accord together."
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JANUARY 2017 59

American Oil and Gas Reporter - January 2017

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