As Q1 2019 involves a detailed, it’s time to evaluate the standing of some predictions I made right here the day after Christmas for what we’d see in the course of the first half of 2019. Accurately gauging the place the trade shall be a number of months into the long run is all the time a crap shoot, and as common, I discover myself feeling glad I did not exit and guess the farm on any of those.
First, let us take a look at what I needed to say concerning the home rig rely as calculated by the parents at DrillingInfo:
…my first prediction is that we’ll see a gradual fall within the home U.S. rig rely all through the primary half of 2019. Indeed, the DrillingInfo Daily Rig Count already fell by about three% throughout December, from 1160 to 1120 on December 25. I am betting that, by June 30, that measure shall be under 1050…
This explicit rely completed the quarter at 1049, after falling slowly however steadily all through the primary three months of the yr. This represents a 9% drop since Christmas day, and there’s no actual motive to count on this development to vary in the course of the second quarter, with so many upstream corporations prioritizing inventory buybacks and different applications designed to return capital to traders and lenders over the mad rush to extend manufacturing we noticed all through 2017 and the primary eight months of 2018.
An inexpensive up to date guess could be that we’ll see the DrillingInfo rely fall to proper round 1000 by the point June 30 rolls round.
What about crude costs? Here’s what I predicted they might do in Q1:
…my second prediction is that the value for WTI will rise once more, however won’t exceed $60 in the course of the first half of 2019.
As issues turned out, I had the overall path of crude costs proper, however underestimated how quickly they might rise, as WTI closed at $60.14 in Friday’s buying and selling. The primary market dynamics that advocated in December for what has been a 20% restoration within the WTI benchmark stay in place in the present day. Global demand continues to rise extra quickly than all of the consultants thought it could on the first of the yr, and the OPEC-plus nations nonetheless keep fairly sturdy compliance with their export quotas.
Reinforcing these prevailing dynamics is the truth that U.S. manufacturing shouldn’t be rising as quickly to date in 2019 because it did all through 2018. In reality, the U.S. Energy Information Administration (EIA) introduced on Friday that home manufacturing really dropped barely from December to January, the primary such drop in month-to-month manufacturing in additional than half a yr. That sadly put the mislead my third prediction, that “the domestic oil and gas industry will continue to set new all-time production records in each of the first six months of 2019.”
If that is the beginning of a development, with U.S. manufacturing rising at a slower tempo because the rig rely drops, it is going to put much more upward stress on crude costs, clearly. This shall be fascinating to look at as we enter the time of yr when producers are forming up their drilling budgets for the second half of the yr.
My subsequent prediction needed to do with the booming Permian Basin and its transportation bottleneck:
…my fourth prediction is a no brainer: The present pipeline capability bottleneck popping out of the Permian Basin shall be resolved by the third quarter of 2019. By the top of 2020, the area will take pleasure in a major surplus of pipeline capability.
In actuality, that bottleneck has already been considerably resolved, and we’ve seen the unfold between WTI and the Brent crude value slim pretty dramatically. After reaching virtually $10/bbl, that differential had closed to a little bit greater than $7/bbl as of Friday. We ought to see it slim even additional as extra Permian takeaway capability comes on-line over the rest of 2019.
My fifth prediction in December was an entire no-brainer:
…pure fuel costs, after a quick run-up over $four.50/mmbtu in November, will fall again down under $three.00/mmbtu early in 2019 and keep there. I embody this one solely in order that I could be assured of getting no less than one prediction proper.
The NYMEX benchmark for home pure fuel closed at $2.66 on Friday, with no actual motive to count on it to maneuver considerably in both path within the coming months. Ugh.
My ultimate prediction from that December 26 piece was that I might inevitably discover myself again right here on June 30, feeling extremely embarrassed about a number of of the predictions. Three months into the yr, it appears I’ve gauged the overall path of the market fairly precisely, however underestimated how quickly it could change. I am comfortable with that.
We’ll revisit all of this once more on the finish of June.
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