Prolonged Price Slump For Crude Oil, Natural Gas

Ponderosa says no quick fix for markets as commodity oversupply continues

U.S. crude oil and natural gas production will continue to trend lower in the fourth quarter of this year, but both markets will likely remain oversupplied through 2016 and prices for both commodities will remain at multi-year lows. That’s the current forecast from Ponderosa Energy, the energy analytics arm of Denver-based advisory and consulting group Ponderosa Advisors, in its new report Market Malaise: Making Sense of Uncertainty, the latest volume in Ponderosa’s Market Outlook Service.

The report focuses on the near-term outlook for the crude oil, natural gas and natural gas liquids (NGL) markets. All three commodities have hovered in a low-price environment for months, and natural gas could end 2015 with its lowest annual average price in more than a decade. Ponderosa also expects crude oil will again dip below $40 a barrel for a short time this fall as demand for crude wanes at the height of refinery maintenance season. Ponderosa’s proprietary market analysis takes into account that natural gas, crude oil and NGLs have become interconnected in recent years during a period of rapid production growth in US shale plays.

“Natural gas storage has had a big injection season and production growth has continued, which means gas prices will continue to be pressured unless the upcoming winter brings above-normal heating demand,” said Porter Bennett, Ponderosa’s CEO.

“And crude oil prices also will remain under pressure. Our detailed production cost analysis indicates that the country can grow production at $50 a barrel. Given soft demand, and the low cost of production, we don’t see prices at a sustained level above $60 a barrel until 2018,” said Bennett, who has spent more than 30 years in the oil and gas industry. Bennett is best known as the founder of BENTEK Energy. “The global oversupply of crude oil will persist into at least 2017, even if production slows. We don’t see significant bullish signs for demand that would quickly correct the supply imbalance.”

The report also includes information about redeterminations, the process in which banks study balance sheets to decide how much money a company can borrow. Ponderosa since last year has said there will be consolidation and contraction in the oil and gas industry as companies struggle with lower prices for crude oil, natural gas and NGLs.

Click here to read the executive summary.

Ponderosa predicts producers will have to significantly write down their reserves and banks will lower borrowing bases for the weakest companies, leading to distress in the industry with more bankruptcies and acquisitions.

Market Malaise also includes Ponderosa’s outlook for the natural gas market this winter. Natural gas prices are primarily driven by weather, which helps determine gas demand for heating in winter and cooling in summer. The current El Niño weather pattern could mean warmer-than-normal winter temperatures for much of the continental US, bringing less demand for heating, which along with potentially record gas storage inventories will pressure prices over the next several months.