Milling & Baking News - February 17, 2015 - 22

Data

Statts offers update amid radically
altered energy market landscape
Continued from Page 1

during the fall months though rallied
to $4.30 on Dec. 1 and then fell sharply,
sliding to a recent low of $2.88.
While the steep decline in crude oil
prices could trigger reduced production on a lagged basis, Mr. Statts said
a similar curtailment would be limited
in natural gas.
"Even at these prices, we are seeing production growth," he said. "It
will be interesting to see whether the

prices why not? But supply keeps up.
"Storage deficits have been eliminated. It wasn't long ago that $4 seemed
like a low price, and now we're headed toward $2.50. It feels as though it
can't stay there forever, but right now
there is a lot keeping the price there."
Commenting on the plunge in crude
oil prices, Mr. Statts described the
market as "pretty crazy" with declines
essentially driven by a single decision.
At $105.79 per barrel, the June 2014

Henry Hub natural gas spot price
per million btu
$15
$12
$9
$6
$3
$0
1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Rig count versus crude oil prices
per barrel
$160

Baker Hughes oil rig count
1800
1600

$140

Brent crude oil

1400

$120

1200

$100

1000

$80

800

$60

600

$40

400

Baker Hughes oil rig count
$20

200

2005 2006 2007 2008 2009 2010 2011 2012
Feb.

growth continues with the rig count
coming down, but the growth has held
up. Marcellus (a production area in the
Appalachian region) in particular has
been going crazy. But demand keeps
growing, too."
The gradual retirement of coal-fired
electric plants has been a consistent
catalyst for growth, Mr. Statts said.
"Much of that load for power generation falls onto gas," he said. "That
creates an increase in demand. At the
same time pipeline exports to Mexico
have been going up. Industrial demand has been decent or good. Demand keeps going up, and with low
22 / February 17, 2015

Milling & Baking News

2013 2014

spot price of West Texas Intermediate
crude oil was within a stone's throw
of the $106.57 five-year high. The price
has fallen every month since, at an accelerating rate, to an average of $47.22
in January. The price rallied earlier this
month to a shade above $50.
"Even when prices were high,
there was a known oversupply in
the market," he said. "When the
Saudis said 'We are going to maintain our market share,' the market
had nothing to do but come crashing down. It seems unlikely now
that prices will double in the near
term. Even $75 seems unlikely."

From the demand side, Mr. Statts
said forces that could precipitate such
a rise would be rapidly increasing
economic activity, something unlikely
given the slowed growth rate of China
and the economic distress prevailing
in Europe.
On the supply side, more bullish
conditions are gradually taking shape,
he said.
"You're seeing rig counts get
crushed in the United States, which
seems to be what the Saudis were
trying to do - keeping market share
and accepting a lower price for it.
They could have cut production. Their
stance is in dramatic contrast to what
had prevailed, which was, 'We are going to defend price at all cost.'"
Against this backdrop, Mr. Statts is
predicting oil prices to hold in a range
with a possible peak in the coming
months of $65.
"If prices do rise that much, I'd still
expect a drop afterward back into the
$50s again," he said. "It could be in the
$40 or $50 range by the time June rolls
around, and we're speaking about this
at the seminar."
Asked about the possibility of an
outlier scenario, with prices falling
still lower or rallying higher than his
projected range, Mr. Statts said the
chances of prices rising above $75 per
barrel before June are "near zero."
"Longer term, I think there is an
opportunity to move sharply higher,"
he said. "In the short term, on the
low side, there is some probability of
sub $40 oil. There have been forecasts
of $20. I think banks sometimes like
to create hype with dramatic statements, and $20 oil isn't likely. One
banker predicted $200 oil a couple
years ago."
Still, Mr. Statts offered a probability
of about 20% the possibility that the
price of crude oil could slip beneath
$40 per barrel. While the count of drilling rigs is falling dramatically, production will fall slowly, Mr. Statts said.
"A lot of the producing rigs, they
can handle $50 oil," he said. "It isn't
great. The lower prices mostly slow
down the trend of drilling, although
production should remain strong in
shale areas such as North Dakota and
Eagle Ford in Texas."
Turning to the market for electricity,
Mr. Statts said power prices have been
at attractive levels, benefiting to a degree from the weak gas prices.
"It's tricky with electricity, since pricing is more regional," he said. "You're
not seeing the attractive prices in all regions because of some constraints, where
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