Global oil & gas market moves toward equilibrium

The International Energy Agency expects U.S. oil production to be 680,000 barrels per day higher at the end of this year than it was at the end of 2016 as cuts by OPEC have brought the global market back toward equilibrium.

It’s the halftime stretch for production cuts agreed to by the Organization of the Petroleum Exporting Countries and 11 non-OPEC countries. Prices have stabilized recently after falling by about 10% in early March.

If OPEC and the 11 other countries involved in production cuts extend their output cuts beyond the six-month mark there would likely be bigger stock draws, adding further encouragement to producers, including the re-emerging U.S. shale oil sector, the IEA noted in its April oil market report.

“For OPEC countries, compliance has been impressive from the start while non-OPEC participants are gradually increasing their compliance rate, although in their case it is harder for analysts to verify the data,” IEA said.

World oil supply fell by 755 kb/d in March as OPEC and non-OPEC producers pumped less and improved compliance with the output reduction pact. Total non-OPEC output is set to rise again, however, with growth of 485 kb/d expected in 2017, recovering from a decline of 790 kb/d last year.

The IEA notes that overall non-OPEC production is expected to begin rising again in May.

“Even after taking into account production cut pledges from the eleven non-OPEC countries, unplanned outages in Canada as well as in the North Sea, we expect production will grow again on a year-on-year basis by May,” the IEA said in its report.

OPEC agreement boosts U.S. confidence and output

The U.S. is at the forefront of that growth. Output reached 9 mb/d in March, up from a trough of 8.6 mb/d in September 2016, according to IEA data. The agency forecasts U.S. production to be 680 kb/d higher at the end of the year, compared to the end of 2016, an upgrade from IEA’s previous forecast. The U.S. Energy Information Administration forecasts U.S. crude oil production to average 9.9 million b/d in 2018 — and Oil & Gas Journal notes that this is 200,000 b/d higher than its previous forecast. The higher forecast reflects improvements to the rig methodology that captures increased cash flow as production increases, with the largest effect on production in the Permian and Niobrara regions, the Journal noted.

Production in the Permian Basin increased by 57,700 barrels per day in March, according to the Dallas Federal Reserve’s Energy Indicators report. Drilled but uncompleted wells in the Permian are now at their highest level since December 2013, when the EIA began collecting such data.

Global balancing act

What happens with overall global demand will affect market balance going forward. The IEA revised down its demand growth forecast slightly noting weaker-than-expected demand in Russia, India, several Middle Eastern countries, Korea and the U.S.

Demand isn’t falling everywhere, however. Oil & Gas Journal reports that the latest China data show accelerated demand. “Having bottomed out in third-quarter 2016 as transitory factors dampened momentum, year-over-year growth has since recovered steadily, reaching 430,000 b/d in first-quarter 2017 as industrial activity solidified,” the Journal reported, noting that Hong Kong and Chinese Taipei have also seen sharp upticks in demand.

IEA currently estimates 2017 growth at 1.3 mb/d rather than the 1.4 mb/d previously forecast.

“It can be argued confidently that the market is already very close to balance, and as more data becomes available this will become clearer,” IEA said.

We’ve noted on our Capital Alliance Corp. blog recently several positive developments in the oil & gas industry. Oilfield service companies that made it through the downturn are ramping back up and becoming more attractive as merger and acquisition targets, based on the rates they can charge. Those that are innovating with new technology are especially attractive to private equity funds that see these companies on the cutting edge of future oil production.

Oilfield services companies anticipate the outlook for the oil patch will continue to improve over the next six months, according to the quarterly Federal Reserve Bank of Dallas Energy Survey, and we agree. President Trump’s commitment to domestic energy production, combined with a promise to reduce financial regulations, should further expand the opportunities for North American merger and acquisition deals in the oil patch.

We continue to believe that M&A in the oil & gas industry is showing signs of steady acceleration moving through 2017. Service and manufacturing companies are among those gearing up for a sustained energy recovery.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure.