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Last weekend's annual meeting at Windsor Castle again brought together some of the world's leading energy authorities, policymakers, ambassadors, and officials. The Windsor consultation remains the most unique energy meeting in the world, featuring some high-level exchanges among a small number of heavyweights.
The last issue of Oil & Energy Investor discussed the geopolitical dimensions of our Windsor sessions. My two briefings this year had the responsibility of taking point on both production and financing expectations for 2017.
And here's what I told the assembled dignitaries about the real story unfolding between oil supply and demand…
The Most Important Factor Oil Analysts Are Missing
The formation of a balance between supply and demand is well underway, both globally and in the United States. Despite some variations in U.S. production (the travails of the market over the last two days is a good case in point), that balance should arrive by June.
For the year, I estimate U.S. oil production to come in at an average 8.6 million to 9 million barrels a day, with the global daily surplus moving down to about 0.4%. Year-on-year production should increase worldwide by 1.3%.
U.S. natural gas production should average 75 billion cubic feet a day with the daily surplus at around 2.5 billion. That will be 12.5% lower than 2016 and 3.5% higher than the five-year average (but for the first time in years within the range of that average). While the ratio of new production to expected demand will be very tight (less than 0.5%), any anticipated shortage can be easily (and rapidly) met by increased production from large known excess reserves.
Both domestically produced crude oil and natural gas will comprise increasing exports from the United States. Oil exports already account for 1.2 million barrels a day, while some 2 billion cubic feet a day of gas will be exported at liquefied natural gas (LNG) in 2017. That figure is expected to triple by 2020.
Of particular interest to those assembled were my views of "breakeven prices," both in various drilling basins in the United States and globally. My take is for a breakeven oil price of between mid-$50s and mid-$60s per barrel of oil and $3.50 per 1,000 cubic feet of natural gas.
However, these are usually misleading for two main reasons. First, companies actually receive "wellhead prices," the price of oil and gas as it comes out of the ground. The rest of the market price involves additions of wholesale and retail layers. Wellhead prices are currently, on average, 18% below market prices. In addition, at least a 10% internal rate of return (IRR) is needed to keep existing wells in production; expanding an existing field requires an IRR of at least 18%.
All of this means that some wells defined as "profitable" or "breakeven" on paper are catalogued as marginal barrels of production, absent a much hig…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.