The question on everyone’s mind is when—or if—oil prices will recover. Oil prices are a global commodity, meaning that a worldwide event has to take place to adjust prices by a significant amount. With COVID-19 affecting the entire world, prices will respond as the countries with highest demand recover. With airlines running at minimum capacity, cruise ships at dock, and Americans—known for driving—staying home, there is an imbalance in supply/demand.
As many of us are not economists or experts in global supply/demand research, MineraliQ collaborated with the Enverus Market Intelligence team to give mineral owners insights into where they see oil & gas prices going over the next year—distilled down to give owners more clarity and comfort on when their checks might grow.
While there are dozens of scenarios that can impact global prices, it really boils down to demand. Without an increase in demand for oil, there is too much oil on the market, driving prices down. This surplus is why you hear on the news that OPEC+ is looking to curtail production. By taking oil out of the market, they can stabilize prices. The chart below illustrates various scenarios of demand based on different possible COVID-19 recoveries. No one really knows what COVID-19 restrictions will look like, but there is a fair chance that they will depress prices throughout the year.
With the understanding that prices depend on global demand and global production curtailment, we can begin to understand where prices may go this year and in the future. While prices have recovered from lows to ~$40 per barrel, they have stalled out. Also, it is important to note that prices reported in the media are WTI, what is known as the benchmark, and local prices may be different. Local pricing differences are known as basis. For example, for someone who has minerals in the Permian, there is a Permian differential (basis). A basis can be positive or negative, depending on the location of your assets. Mineral owners also do not benefit from an operator’s hedges; hedges are used by operators to reduce the risk of benchmark or basis prices. As an owner, you might hear that an operator is getting $60 per barrel for 2020 due to hedges, but as a mineral owner you will get the actual market pricing, which can be much less.
The chart below shows Enverus Market Intelligence price recovery for both a base case and if COVID-19 lasts longer than initially forecasted.
For those with assets in gassier basins, understanding the recovery of oil prices will drive the forecast of gas prices. Historically gas and oil were looked at separately, with shale gas as a by-product of oil production. With the increase in shale oil wells, there was an abundance of gas in the market from wells that only produce gas, along with this excess gas from oil wells. With the collapse of oil prices and the shut-in of oil wells, there is a forecasted gas shortfall going into late 2020. If we have a cold winter and oil prices do not recover enough to drive new production, gas prices will increase. There is no consensus on where gas prices will go, but many experts expect prices to head north of $2.75/Mcf. Some forecasts are as high as $4/Mcf if oil does not recover and there is a cold winter.
MineraliQ provides a simple and straight forward analysis of where prices are going based on the reality of the global supply/demand models, turning down the noise in the media. If you have any questions about where prices are going or need a personalized analysis on your assets, please reach out to our professional services team.