Oil And Gas Industry Will Be On Steady Footing In 2019 Despite Oversupply Risks

If recent market evidence is anything to go by, oil and natural gas prices will remain volatile in 2019. However, there is much to suggest that the industry has the potential to overcome short-term challenges despite oversupply risks.

For instance, according to Moody's, both U.S. oil and natural gas benchmarks will see range-bound volatility but the rating agency expects the medium-term price band for West Texas Intermediate (WTI) crude, the main North American benchmark, to be $50-$70 per barrel, and North American natural gas at Henry Hub to average $2.50-$3.50/MMBtu.

Writing to its clients, Moody's opined while the recent announcement that OPEC and Russia will cut production helps alleviate concerns about oversupply, the pivotal questions in the coming year are whether OPEC and Russia will maintain their production discipline and what might happen in June, when the current agreement expires.

"Market expectations for continued strong oil demand growth remain in place, despite concerns about slowing demand growth as a result of weaker economic growth, the impact of tariffs and a strong U.S. dollar," Steve Wood, Moody's Managing Director for Oil & Gas, noted.

"Very high Saudi and Russian production, in particular, has heightened supply volatility, so whether OPEC and Russia maintain production discipline and renew agreements to limit output are key concerns going into the new year."

Investors in exploration and production (E&P) companies "will continue to wait for better returns" in 2019, according to Moody's. Although capital efficiency has improved and commodity prices are higher than in 2015-16, infrastructure constraints have lifted transportation costs.

And though the oilfield services (OFS) sector will see earnings increase by 10% to 15%, they currently remain at low levels, and most of the recovery will occur only later in the year. Conversely, refiners' distillate margins will begin to expand from already strong levels in the second half of next year, Moody's said.

Crucially, in North America, wide differentials for regional oil and natural gas will narrow as infrastructure coming into service in late 2019 and 2020 eases bottlenecks in the Permian Basin, western Canada and other regions, relieving stress on commodity prices.

Additionally, Asian national oil companies will have to contend with risks from volatile commodity prices, rising shareholder returns and evolving fuel-price regulations, the agency noted further.

Meanwhile, the outlook for offshore OFS contractors remains strong, according Rystad Energy, with more than 100 new projects slated for 2019 approvals and greenfield commitments worth $120 billion.

An expected $210 billion will be spent on offshore OFS globally next year, the Oslo, Norway-headquartered research firm said. Its projection follows four consecutive years of declining revenues, but those OFS firms still standing can expect revenues to start growing again this year.

"The offshore service market is like a super tanker: It takes time to accelerate. The uptick in new projects in 2017, 2018 and now 2019 will be enough to turn revenue growth positive to mid-single digits as offshore capital expenditure is set to increase due to the recent years of capital commitments. And on top of that comes expected increase in operating expenses," Audun Martinsen, Head of Oilfield Service Research at Rystad Energy, noted.

Despite the fact that oil prices came down during the fourth quarter of 2018, operators still plan to spend more next year and move forward on project sanctioning.

More than 85% of the projects that Rystad Energy expects to be approved in 2019 will generate returns greater than 10% even at current oil prices, as development costs have been reduced by as much as 30% since 2014.

Unit prices in 2018 were down at levels not seen by the offshore market since 2006, which naturally has positive implications for the break-even prices of the projects in question.

Providing a regional break-up, Rystad Energy says 30% of 2019 projects value sits in Middle East, 25% in South America, 15% in both Africa and Asia, and the rest in Europe and North America combined.

Source: Forbes