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Half-Time Report

In January, as I do every year, I made several energy predictions for the coming year. (See A Happier New Year for Energy.) Now that half the year is in the books, I thought it might be a good idea to check in and see how these predictions are tracking.   

As a reminder, I strive to make predictions that are specific, measurable, and preferably actionable. If forecasts are broad and vague, one can almost always declare victory. I would also remind readers that my predictions are based on what I believe will happen, which isn’t the same thing as predicting what I want to happen. My desire for a particular outcome has absolutely no bearing on a prediction. I am simply trying to accurately gauge the most likely outcome.

Here are the predictions, along with an update through the first half of the year.

1. U.S. oil production will suffer an annual decline for the first time in eight years

I noted that I had the most confidence in this particular prediction. The only way I could foresee this one going wrong was if oil prices made a strong recovery to $60/bbl very early on — which I didn’t expect to happen.

In this case, I will just let the graphic speak for itself:

160712TELusoilprod

The numbers are only available through April of this year, but production has been falling pretty steadily now since April 2015. This still looks like the first time in eight years that year-over-year U.S. crude oil production will decline.

2. The closing price of the front month West Texas Intermediate (WTI) crude contract will reach $60/bbl in 2016.

When I made that prediction the price of WTI was $36.14/bbl. It would require a gain of 66% from that price to be proven right.

I noted that this was a very aggressive prediction, and that I would grade it on a curve as a result. I would consider it a complete fail if prices failed to crack $50/bbl this year, which was still 38% above the price at the time I made the prediction.

WTI closed as high as $51.23/bbl in early June. Despite a recent headline-making prediction by analyst Gary Shilling that the price will still fall to $10/bbl (something he has been repeating for more than a year), we have almost certainly seen the lows for this cycle.

However, there is still resistance to the upside. There is a lot of shut-in production that will begin to come online if prices head toward $60, and the Brexit vote has fanned concerns about a stronger dollar and weaker demand. Further, global inventories are still at very high levels.

But considering that oil has already moved up some $15/bbl since I made this prediction, that $60 target it isn’t a huge long shot at this point.

3. U.S. natural gas production will suffer an annual decline for the first time in 11 years

In 2015 monthly natural gas production averaged 2.252 trillion cubic feet (tcf) per month. Through April of this year that number has declined ever so slightly to 2.246 tcf/month. 2015 saw two months above 2.3 tcf/month, while thus far in 2016 there have been no months above this level.

This one remains too close to call but it is tracking in line with the prediction at this point. On the other hand, natural gas prices have strongly advanced since January, and that may spur more production in the second half of the year.

4. The Energy Select Sector SPDR ETF (XLE) will rise at least 15% in 2016.

Despite my attempt to always make predictions that are specific and measurable, I realized after the fact that I failed to make an important distinction here. I didn’t indicate that the XLE would rise this much for the full year. The XLE has already crossed the 15% mark in 2016, which is impressive considering that it was in negative territory when I made the prediction.

But instead of declaring victory, allow me to offer the important qualifier I inadvertently left off in January. I expect the XLE to finish the year up at least 15%.

As I said when I made this prediction “fundamentals will ultimately win out, and I think we will see the industry’s prospects start to improve before the end of 2016.” That has certainly happened, but a lot can still happen in the second half of the year.

5. Hillary Clinton will win the 2016 presidential election.

This prediction actually generated a lot of angry emails and comments on Facebook. I had people call me a moron for being so naive as to believe Hillary would beat Bernie Sanders, and I have had people tell me in no uncertain terms that “Donald Trump will win in a landslide.”

Meanwhile, Clinton has since dispatched Sanders and is tracking well ahead of Trump in national polls.

While this isn’t an energy prediction as such, it is one with significant energy policy implications. I continue to expect Hillary Clinton to win, and to pursue energy policies similar to those pushed by the Obama Administration as president.         

Conclusions

My midterm grades are looking pretty good at this point. I often note that everything looks obvious in hindsight, but I got a lot of pushback on these predictions when I made them. I even heard from a commander in the Indian Navy who said that my second and fourth predictions “defy the current trends and assessment by other studies.”

All of the predictions remain on track to prove correct during the second half of 2016, with the greatest uncertainty attached to the $60/bbl price target for oil  this year. That price is on the way, to be certain, but with inventories still as high as they are it might not arrive until 2017.  

Please consider subscribing to The Energy Strategist to see the winning stock picks based on these predictions. In particular, our decision early on to get bullish on on select natural gas producers has generated big gains for subscribers.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 

 


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