I thought it would be helpful to provide a brief lay of the landscape for the energy sector in terms of expectations for differentials in oil and gas pricing. The amounts of both oil and gas in storage are about 15-20% above their respective five-year average levels. However, oil production is growing substantially and gas production domestically is flat year over year. We expect oil to go lower (still) while the natural gas market is tight and a small demand increase could drive a shock. With pipelines delayed or having start-up issues (such as Seaway), we believe that wide differentials could persist well into 2014, if not longer. If the U.S. economic recovery were to accelerate from current expectations – as we think it could – we will adjust our outlook for oil demand.
Gas - This week we saw a bullish gas inventory draw and gas in storage now sits at 2.4 BCF (billion cubic feet), which is 8% below last year but remains 17% above the five-year average. With the gas rig count hovering around a 13-year low and off 40% from this time last year, the stage is set for cooperative weather (i.e. a hot summer) to potentially drive gas prices north of $5/mmBtu (one million British thermal units) in the short term. Our longer-term price expectations are $3.50-$4/mmBtu.
Oil - This week we saw a bearish oil inventory build and oil in storage now sits at 376.4 mmbl (million barrels), which is 11% above last year and 16% above the five-year average. With the oil rig count up 5% year over year and production growing significantly, the bias is to the downside for the oil price.
Differentials - Inventory levels at Cushing, Oklahoma, also increased by 0.4 mmbbl (0.8%) versus last week and currently sit at 50.7 mmbbl, 58% above last year and 71% above the five-year average. Pipelines will not solve this in a day. It will be 2015 at the earliest, in my view. Differentials will remain wide and this is why we own the refiners.