|W&T OFFSHORE INC filed this Form 10-Q on 05/04/2017|
EIA projects average crude oil prices for WTI and Brent to increase by approximately $9.00 per barrel and $10.00 per barrel, respectively, for the year 2017 compared to 2016 and to increase in 2018 over 2017 by approximately $3.00 per barrel for each. Their estimate notes that production in the U.S. is expected to increase while being mostly offset by production decreases by OPEC and Russia bringing levels closer to agreed-upon production cuts. EIA notes the recent U.S. onshore activity has created the expectation of increased U.S. production in 2017causing EIA to increase the premium of the 2017 Brent price over WTI. In addition, the strength in the U.S. dollar relative to other currencies also has an impact on crude pricing. Because all barrels are traded in U.S. dollars, as the U.S. dollar gains strength, crude prices are lower in U.S. dollars but are more expensive in other currencies.
During the three months ended March 31, 2017, our average realized NGLs sales price increased 67.2% compared to the same period in 2016. Two major components of our NGLs, ethane and propane, typically make up over 70% of an average NGL barrel. During the three months ended March 31, 2017, average prices for domestic ethane increased 40% and average domestic propane prices increased 85% from the same period in 2016. Average price changes for other domestic NGLs were an increase of 44% to 86% between the two periods. Per EIA, production of ethane increased by 9% in the three months ended March 31, 2017 over the same period in 2016 and propane production decreased by 2% in the three months ended March 31, 2017 over the same period in 2016. Ethane inventories are higher than the same period in 2016, increasing 53%, but have decreased 4% from the fourth quarter of 2016. Ethane usage is not impacted by weather. On the other hand, propane usage is affected by weather as it is used for house heating fuel in certain areas and for crop drying, along with other uses. Propane inventory levels are lower coming out of the winter season and are 32% lower than the comparable period in 2016 even with the winter of 2016-2017 being unseasonably warm. Many natural gas processing facilities have been and, from time to time, will likely continue re-injecting ethane back into the natural gas stream after processing due to insufficient ethane demand, which negatively impacts production and natural gas prices. Ethane demand is expected to increase in 2017 over 2016 as petrochemical plants and expansion projects that consume ethane come online.
During the three months ended March 31, 2017, our average realized natural gas sales price increased 48.3% compared to the same period in 2016. According to the EIA, spot prices for natural gas at Henry Hub (the primary U.S. price benchmark) were 51.5% higher in the three months ended March 31, 2017 from the same period in 2016. Natural gas prices are more affected by domestic issues (as compared to crude oil prices), such as weather (particularly extreme heat or cold), supply, local demand issues, other fuel competition (coal) and domestic economic conditions, and they have historically been subject to substantial fluctuation. Average spot prices in the first quarter of 2017 were similar to levels in the fourth quarter of 2016. During the 2016-2017 winter, inventory drawdowns were higher than the prior year period due to lower production and higher exports, partially offset by lower consumption. Inventories at the end of the first quarter of 2017 were 17% lower than the prior year period, which are expected to move inventories closer to the five-year average by the time the heating season begins in 2017. The narrowing of inventory levels is reflected in EIA’s forecast of rising natural gas prices discussed below. U.S. consumption was lower in the first quarter of 2017 compared to the same period in 2016, with decreases in all categories and electric power generation being the primary category of the decrease in consumption.
The average price of natural gas continues to be weak from an overall economic standpoint, and we expect continued weakness in natural gas prices for a number of reasons, including (i) producers continuing to drill in order to secure and to hold large lease positions before expiration, particularly in shale and similar resource plays, (ii) natural gas continuing to be produced as a by-product of oil drilling, (iii) production efficiency gains being achieved in the shale gas areas resulting from better hydraulic fracturing, horizontal drilling, pad drilling and production techniques (iv) higher inventory levels and (v) re-injecting ethane into the natural gas stream as indicated above, which increases the natural gas supply.
EIA projects natural gas prices to increase in 2017 compared to 2016 by 23% and further increase by 12% in 2018 over 2017. U.S. supply is projected to be approximately equal to consumption in 2017 and 2018. During 2016, natural gas overtook coal as being the largest fuel source for power generation, supplying 34% of the megawatts generated compared to 30% from coal. EIA’s forecast of fuel used for power generation has natural gas continuing to be the largest in 2017 and 2018, but it’s percentage to fall to 32% for both years while the percentage from coal is forecast to increase to 31% for both years. This is due to the expected higher natural gas prices compared to coal.