S&P Global Ratings today lowered its average annual price assumptions for Brent and West Texas Intermediate (WTI) crude oil for 2019 by $10 per barrel (bbl) to $55/bbl and $50/bbl respectively, and for 2020 by $5/bbl to $55/bbl and $50/bbl. Our long-term oil price deck for 2021 remains at $55/bbl for both Brent and WTI. Our Henry Hub natural gas price assumptions are unchanged at $3 per million Btu through 2021. These revisions are effective immediately.
Several factors have combined to abruptly reverse the direction and sentiment on oil prices. The ongoing trade war between the U.S. and China as well as news of China's economic slowdown, has led to concerns about the outlook for global demand. Moreover, OPEC+, particularly Saudi Arabia and Russia, were producing at record levels to offset what was expected to be a meaningful reduction in global supply due to the Iranian economic sanctions. However, the sanctions themselves fell short of expectations on Nov. 2 when it was announced that eight countries would be exempted for six months from Iranian oil import sanctions. This had the effect of drastically increasing the amount of oil expected to be on the market. All the while U.S. production, driven by unrelenting growth from shale, continued to increase.
With talk of oil possibly reaching in the low-$40/bbl in the near term, OPEC and Russia agreed on Dec. 6 to cut production for six months beginning January 2019, by a combined 1.2 million barrels from October 2018 levels to stabilize the market. However, the announcement did little to stem the decline in oil prices as concerns about global demand and whether OPEC would honor the production cuts, continued to put pressure on prices. Indeed, the price of Brent, which had closed at $86.07/bbl Oct. 4, fell to $51.49/bbl on Dec. 27.
(Graph and Table by S & P Global Ratings)
The production cuts at a minimum, will offset the anticipated growth in 2019 from U.S. shale production. The U.S. Energy Information Administration (EIA) has forecasted that at a WTI price of $54/bbl, U.S. production will grow 1.18 million barrels per day (bbl/d), just shy of the 1.2 million of production cuts announced by OPEC, effectively undercutting OPEC's efforts to balance the market. Much of this production is anticipated to come from the Permian Basin, which is currently constrained by a lack of pipeline capacity. Production from the region has bumped right up against the 3.4 million bbl/d of regional take out capacity. However, S&P Global Platts expects that an additional 2.6 million bbl/d of pipeline capacity will come online in 2019 and early 2020.
Our long-term price deck assumptions of $55/bbl for both Brent and WTI mostly reflect our view of the pronounced industry cost deflation that has taken place the past few years. We also recognize that oil demand growth for the next few years is likely to remain positive, albeit moderating over time. We continue to see a fundamental shift occurring in the U.S. natural gas production profile; production has veered from the Southwest and Rockies to the prolific and economic Marcellus and Utica shale plays in the Northeast. We expect the significant build-out of takeaway capacity that is continuing to occur, will lead to further narrowing of the differentials and lead to ongoing production increases.