Permian Activity Flattening / Growth is Moderating Given Pipeline Constraints
Although the Permian rig count has continued to climb to over 500 drilling rigs running, new well completions in the play have flattened out month over month as in-basin transportation constraints begin to materialize.1 As shown in a recent EIA report graphics below, the ratio of new-well production per rig has also begun to decrease.2
E&P companies are waiting for additional pipeline capacity to move the hydrocarbons produced, and therefore many newly drilled wells are not being completed until there is a clear path to market.
Beyond 2018, limited Permian Basin production takeaway capacity is likely to emerge as the most challenging constraint for producers. Through 2020, just a single capacity expansion project, Kinder Morgan’s 1.98 Billion Cubic Feet per day (“Bcf/d”) Gulf Coast Express Pipeline, has reached final investment decision (“FID”) status and began construction in May 2018. The expected price tag for this pipeline running from the Permian Basin to the Agua Dulce, Texas area is $1.75 billion.3 At least four other pipeline projects, with a combined capacity of more than 5.7 Bcf/d, are still awaiting a final investment decision.4 Oil pipeline constraints out of the Permian basin may continue through early 2020, according to an analysis by Wells Fargo.
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 September 17, 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 September 17, 2018, pricing, the futures markets indicate that in mid-October 2018 the expected strip price is $69.33, with a 68% chance that oil prices will be between $64 and $75 per barrel. Likewise, there is about a 95% chance that prices will be between $58 and $83. For a longer-term view, by mid-December 2018 the approximate one standard deviation price range is between $60 to $79 per barrel with an expected value of $69.08. Also, oil future prices are still in “backwardation.”
Natural Gas Outlook
The natural gas futures contracts are currently trading at $2.80 per MMBtu for the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in October 2018, the expected price is $2.80 with a +/- 1σ price range of $2.55 to $3.00 per MMBtu, and the 2σ range (95%) of $2.35 to $3.30 per MMBtu. For a longer-term view, by mid-December 2018 the expected price is $2.86 per MMBtu with a +/- 1σ price range of $2.55 to $3.60 per MMBtu.
1. CreditSuisse, 31 August 2018, Americas/United States Equity Research, Oil & Gas Exploration & Production U.S. E&P Weekly
Tags: Oil & Gas Price Outlook September 2018, Gas Price Outlook September 2018, Oil Price Outlook September 2018
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