Energy Prices and Possible Implications for Eagle Ford Players
Energy price outlook
Previously, we discussed mixed opinions on the Eagle Ford Shale. Let’s now look at crude oil price expectations.
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Supply and demand
In its March STEO (Short-Term Energy Outlook) report, the EIA (U.S. Energy Information Administration) stated that oil markets appear to be balancing supply and demand in early 2017. It also mentioned that the outlook for oil markets remains ambiguous given various supply developments. The STEO report stated that “lower OPEC1 market share could complicate whether its members will renegotiate voluntary supply reductions for the second half of 2017.” The EIA expects the increase in non-OPEC supply, especially in the United States, to limit upward pressure on oil prices through most of 2017.
Implication on prices
Implied volatility for crude oil has declined from the peaks seen in December, as shown in the image above. It continued to decline to a one-year low in February this year. WTI’s (West Texas Intermediate) implied volatility fell six percentage points between February 1 and March 2. Oil price volatility can have a significant impact on upstream stocks. The EIA expects an average price of $54 per barrel for WTI in 2017 and $56 per barrel in 2018.
Eagle Ford producers’ take
Given that the Eagle Ford Shale is both an oil and gas play, producers can choose to drill whatever is more economical based on the outlook for oil and gas prices. Their drilling decision will also obviously depend on their acreage positions. A case can be made for drilling natural gas, natural gas condensate, and NGLs (natural gas liquids) such as ethane, propane, and butane (all of which are by-products of processing raw natural gas), as these offer attractive prices.
Therefore, producers will likely consider the Eagle Ford Shale to avoid the land rush in the Permian basin and the higher costs as a result of this. With an increasing or steady oil price outlook, producers could consider looking beyond the Permian.
- Organization of the Petroleum Exporting Countries ↩