|W&T OFFSHORE INC filed this Form 10-Q on 05/04/2017|
Our operating results are strongly influenced by the price of the commodities that we produce and sell. The price of those commodities is affected by both domestic and international factors, including domestic production. During the three months ended March 31, 2017, our average realized oil price was $47.06 per barrel. This is an increase over our average realized oil price of $26.73 for the three months ended March 31, 2016 and an increase over our average realized oil price of $37.35 per barrel for the year 2016. In addition, average realized prices of NGLs and natural gas for the first quarter of 2017 were higher than average realized prices for the three months ended March 31, 2016 and the year 2016.
The overall crude oil and other petroleum liquids market remains in an oversupply position. This is important as excess supplies necessarily limit price increases and could cause future prices to fall until such time as the market becomes more balanced.
Selected issues and data points related to crude oil, NGLs and natural gas markets are described below.
The U.S. Energy Information Administration (“EIA”) estimates the worldwide crude oil and petroleum liquids supply will exceed demand in 2017, resulting in crude oil and other petroleum liquids inventories increasing by 0.2 million barrels per day. EIA expects worldwide production to increase by 1.1 million barrels per day in 2017 over 2016 and increase by 1.9 million barrels per day in 2018 over 2017. The expected increases are primarily in the U.S. and Brazil, with OPEC production expected to be fairly flat in 2017 and increasing in 2018. EIA reports the market’s perception is that the voluntary production cuts by OPEC and Russia are expected to be extended and that EIA assumes production volumes will approach pre-agreement levels in the second half of 2017. Consumption is forecast to increase in 2017 by 1.5 million barrels per day in 2017 over 2016, and further increase by 1.6 million barrels per day in 2018 over 2017. As in the January forecast, the first future quarter where consumption exceeds supply is the third quarter of 2017, but then reverting to inventory builds in the following three quarters.
According to data provided by EIA, U.S. production of crude oil (excluding other petroleum liquids) increased in the first quarter of 2017 by 2% compared to the fourth quarter of 2016. EIA’s estimate for 2017 of U.S. crude oil production is an increase of 4% from 2016. As noted below, the number of rigs drilling for oil increased at the end of the first quarter of 2017 compared to year-end 2016.
In addition, it is important to note that geopolitical events could greatly affect the prices for oil, natural gas and other petroleum products. While these events are difficult to predict, we note the deteriorating political environment in Venezuela that could affect approximately 0.7 million barrels per day of crude oil exports to the U.S. In addition, the political environments in other international areas, such as the Middle East and North Korea, could also affect prices for oil, natural gas and other petroleum products.
During the first quarter of 2017, our average realized oil sales price was $47.06, up from $26.73 per barrel (76.1% higher) for the same period in 2016. The two primary benchmarks are the prices for WTI and Brent crude oil. As reported by the EIA, WTI crude oil prices averaged $51.62 per barrel for the first quarter of 2017, up from $33.35 per barrel (54.8% higher) for the same period in 2016. Brent crude oil prices averaged $53.59 per barrel for the first quarter of 2017, up from $33.84 per barrel (58.4% higher) for the same period in 2016. The reductions in international crude oil supply and rising U.S. crude oil production put upward price pressure on the premium of Brent to WTI, as the premium increased in the first quarter of 2017 compared to the fourth quarter of 2016.
Our average realized oil sales price ($47.06 per barrel compared to a WTI benchmark price of $51.62 per barrel) for the first quarter of 2017 differs from the benchmark crude prices due to premiums or discounts (referred to as differentials), crude quality adjustments, volume weighting and other factors. All of our oil was produced offshore in the Gulf of Mexico and is characterized as Poseidon, Light Louisiana Sweet (“LLS”), Heavy Louisiana Sweet (“HLS”) and others. WTI is frequently used to value domestically produced crude oil, and the majority of our oil production is priced using the spot price for WTI as a base price, then adjusted for the type and quality of crude oil and other factors. Similar to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past. The monthly average differentials of WTI versus Poseidon, LLS and HLS for the first quarter of 2017 were a negative $3.04, a positive $1.58 and a positive $1.02 per barrel, respectively, compared to a negative $3.71, a positive $1.60 and a positive $0.80 per barrel, respectively, for the same period in 2016. The majority of our crude oil is priced similar to Poseidon and therefore, is experiencing negative differentials. In addition, a few of our crude oil fields have a negative quality bank adjustment.