Source: Enverus RADAR, January 3, 2020

Trey Cowan, Senior Analysts, Enverus Drillinginfo

Calendar year 2019 was a weak year for WTI crude oil prices relative to the preceding year. Daily oil prices averaged a little more than $57 per barrel over the year. Marking a decline of nearly $8 per barrel compared to 2018’s average price for WTI crude oil.

Furthermore, relative to the average price shown (i.e., the grey dotted line); the price of oil settled at a price less than the average for majority of the trading days in 2019. Specifically, during 2019 the number of trading periods with below average prices equaled 139 days versus 116 days with above average settlements (a 45% above vs. 55% below split). Conversely, during 2018 there were more days where oil prices traded at above average settlements (a 60% above vs. 40% below split for that year).

My wife recently introduced me to the concept of mast years for trees. This is a phenomenon where trees in a region (e.g., live oak trees) have a tendency to synch up their pollination and overproduce their seedings. In the case of oak trees, it would be a bumper crop of acorns. Before you think this author has gone off on tangent, we will explain why we bring up the topic.

While no one can say definitively why mast years tend to occur, there is one observation that may provide some analog for the energy markets of late. The conventional wisdom goes that the overproduction of seeds is nature’s way of putting more seeds out there than animals can forage in the particular season. Thus, ensuring that the trees then make up for previous depressed seasons and reproduce in sufficient numbers.

The similarity for the oil & gas industry is found by looking at how the growth in supply domestically has outpaced both the takeaway infrastructure to get production to market and the demand of the market itself. The end result has been both a diminished price and a diminished market (i.e. fewer investors). However, the point is that the future investment will be based on prudent decisions rather than a follow the herd response.

While it may be a little premature to give the “Coast is clear” signal, the futures market for crude oil has been improving over the final three months of 2019. Looking at the NTM Futures Strip (which is the average of the next twelve months contract prices), we see that oil prices have improved from an average of $52 per barrel strip in October to nearly $59 per barrel at the end of 2019. Perhaps what we witnessed over 2018 and 2019 was the Mast Year for crude. Only time will tell if we are now set up for a prolonged recovery across the industry..

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