GUEST POST: Bakken Update by Michael Filloon

Oil prices surged today on news the IEA estimates US shale production will decrease by 600,000 barrels/day in 2016. It will decrease an additional 200,000 barrels/day in 2017. Oil prices moved higher as initial estimates had shale production decreasing by 400,000 barrels/day this year. The IEA also stated that a balance in the oil markets from a supply and demand perspective will happen in 2017.

Some analysts believe this will occur in the 3rd quarter of this year, so there is still some disagreement. This affects the Bakken in several ways. By increasing the total shale decline in the US, the Bakken could suffer more and longer as well. It is possible the Bakken will lose more production this year than other major US plays. The Permian (West Texas) is expected to continue to increase production. The Eagle Ford, Niobrara and Bakken all expect declines.

Looking at the ND Bakken specifically, we believe production declines over the next 12 months will be between 200,000 and 400,000 barrels/day depending on oil prices. If we see World supply and demand balance in late Q3 or early Q4, then we may see the lower of the two numbers. If this takes longer (2Q17), we could expect ND production to decrease by up to 400,000 bbls/d. We are in the camp that production will decrease approximately 200,000 to 250,000 barrels of oil per day by year end. While this will not be good for ND, it wont be a disaster. Oil prices will continue to trade in the $20 to $40/bbl range through the first half of the year. We then expect oil to trade between $45 and $55 in Q3. The Q4 range may be $50 to $60. The bright spot is seeing $80/bbl oil in 2017 although the average will be in the $65 to $70 range.

Since Bakken light crude trades at a differential to WTI, operators receive less. The differential can be thought of as the cost of transport (general description), to get oil to the buyer. This is either a refinery or oil storage hub. On average, most operators realize Bakken light prices that are $10 to $4/bbl less than WTI (West Texas Intermediate is the standard for US oil prices). We would expect drilling activity to pick up in 4Q16, and steadily increase through 2017. Keep in mind, there will be extreme volatility through the first half of this year. This will include large increases and declines in oil price. We also expect some high profile Bakken names to default and declare bankruptcies, so be careful when navigating the oil markets.

Michael Filloon
Co-Founder and Portfolio Manager - Hartstreet LLC