A Tale of Two Permian’s
While much of the press is focused on “the Permian,” current activity in the Permian is focused on two different sub basins: the Delaware Basin to the West and the Midland Basin to the East. While there is a Central Basin Platform in between, most of the current activity is focused in the Delaware and the Midland basins.1
Within each of these sub basins are multiple geologic formations, as shown in the table below.
A key difference between the two sub basins is the availability of pipeline capacity to move production from the wellhead to points of sale. Although differentials are high, the Delaware sub basin has and is expected to have adequate capacity.
However, according to a recent Wells Fargo research report,2 there will be a shortfall of gas processing capacity in the Midland sub basin over the next 5 years, expected to keep differentials high and potentially slow growth.
Another key difference between the two sub basins are the current break-even prices required to drill a well.3 As shown in the following table, the Midland sub basin has the lowest required pricing for a typical well to break-even ($44.05), while the Delaware has one of the highest required break-even prices of $49.45.
Break Even Oil Prices
Crude Oil Outlook
While futures markets aren’t a crystal ball, their price levels and related options are useful for estimating future ranges, or “confidence intervals,” for crude oil and natural gas prices.
The graphic below illustrates the crude oil pricing as of February 15, 2018 and predicted crude oil prices based on options on oil futures contracts (ticker /CL). The blue lines are within one standard deviation (σ) of the settlement price (the middle, green line), and the outside, red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).
Based on February 15, 2018, pricing, the futures markets indicate that in mid-March 2018 the expected strip price is $55.59, with a 68% chance that oil prices will be between $50.50 and $60.00 per barrel. Likewise, there is about a 95% chance that prices will be between $44.00 and $66.50. For a longer-term view, by mid-July 2019 the approximate one standard deviation price range is between $47.00 to $70.00 per barrel with an expected value of $57.48. Strip prices are no longer in backwardation.
Natural Gas Outlook
The natural gas futures contracts are currently trading at $2.60 per MMBtu for the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in March 2019, the expected price is $2.66 with a +/- 1σ price range of $2.35 to $3.05 per MMBtu, and the 2σ range (95%) of $1.95 to $3.60 per MMBtu. For a longer-term view, by mid-July 2019 the expected price is $2.76 per MMBtu with a +/- 1σ price range of $2.35 to $3.20 per MMBtu.
2. Wells Fargo Securities, Midstream Monthly Outlook: Feb 2019. A Review of Midstream/MLP Trends & Statistics
Tags: Oil & Gas Price Outlook February 2019, Gas Price Outlook February 2019, Oil Price Outlook February 2019
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