JEDDAH —

S&P Global Ratings lowered its average annual price assumptions for Brent and West Texas Intermediate (WTI) crude oil for 2019 by $10 per barrel (bbl) to $55/bbl and $50/bbl respectively, and for 2020 by $5/bbl to $55/bbl and $50/bbl. Our long-term oil price deck for 2021 remains at $55/bbl for both Brent and WTI. “Our Henry Hub natural gas price assumptions are unchanged at $3 per million Btu through 2021. These revisions are effective immediately.”

It was just a few months ago that oil market soothsayers were calling for oil to reach $100/bbl. Several factors have combined to abruptly reverse the direction and sentiment on oil prices. The ongoing trade war between the US and China as well as news of China›s economic slowdown, has led to concerns about the outlook for global demand.

US production, driven by unrelenting growth from shale, continued to increase.

With talk of oil possibly reaching in the low-$40/bbl in the near term, OPEC and Russia agreed on Dec. 6 to cut production for six months beginning January 2019, by a combined 1.2 million barrels from October 2018 levels to stabilize the market. However, the announcement did little to stem the decline in oil prices as concerns about global demand and whether OPEC would honor the production cuts, continued to put pressure on prices. Indeed, the price of Brent, which had closed at $86.07/bbl Oct. 4, fell to $51.49/bbl on Dec. 27.

The US Energy Information Administration (EIA) has forecasted that at a WTI price of $54/bbl, US production will grow 1.18 million barrels per day (bbl/d), just shy of the 1.2 million of production cuts announced by OPEC, effectively undercutting OPEC›s efforts to balance the market. Much of this production is anticipated to come from the Permian Basin, which is currently constrained by a lack of pipeline capacity. Production from the region has bumped right up against the 3.4 million bbl/d of regional take out capacity. However, S&P Global Platts expects that an additional 2.6 million bbl/d of pipeline capacity will come on line in 2019 and early 2020.

Our long-term price deck assumptions of $55/bbl for both Brent and WTI mostly reflect our view of the pronounced industry cost deflation that has taken place the past few years. We also recognize that oil demand growth for the next few years is likely to remain positive, albeit moderating over time.

Over the past few years, marginal production costs have declined significantly due to engineering optimization, improved drilling efficiencies, and cost reductions, especially in higher-cost US shale formations. Drillers, forced to improvise because of the low prices, have introduced new drilling, fracking, and well-completion techniques that have resulted in more permanent cost reductions. While we›ve seen some nominal upward pricing pressure recently from oilfield service companies, particularly for onshore US completions, many operators are targeting at least flat or lower unit costs through ongoing improvements in efficiency, digitization, or closer cooperation with service companies and drillers.

We continue to see a fundamental shift occurring in the US natural gas production profile; production has veered from the Southwest and Rockies to the prolific and economic Marcellus and Utica shale plays in the Northeast. We expect the significant build-out of takeaway capacity that is continuing to occur, will lead to further narrowing of the differentials and lead to ongoing production increases.

The boom in US oil shale drilling in recent years has also produced natural gas as a by-product of liquids extraction, with a significant ramp-up in natural gas production from the Permian basin and other oil regions. However, natural gas production has exceeded existing processing and takeaway capacity, resulting in wide natural gas basis differentials in the Permian. Several new pipelines are under construction, which should alleviate this bottleneck over the next two years. Once the takeaway capacity constraints are relieved, we believe these low-cost plays will be able to quickly meet any uptick in demand (e.g., from increased power generation, industrial production, or liquefied natural gas exports) effectively creating a cap on prices. — SG