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Higher oil prices signal optimism for fiscal revenues in 2018

...Nat gas outlook likely to remain muted
Published: 
Thursday, January 18, 2018

Finance Minister Colm Imbert should be confident that he is likely to receive more revenue from the energy sector than he had initially budgeted with clear signs that crude prices are likely to be sustained over the fiscal year at a price higher than he initially budgeted.

To put this is context, last year T&T produced on average just over 71,000 barrels of oil per day (bo/d) and out of that 71,000 bo/d about 20,000 bo/d is light sweet crude and fetches a price of US$1.50 a barrel more than Brent (an international benchmark to determine light sweet crude prices.). The other 50,000 bo/d averages about US$2 less than West Texas Intermediate Price which is another benchmark used to price crude oil.

In October, Brent crude averaged US $54.92 a barrel.

In November, it increased to US$59.93.

In December, it went to US$61.19.

Keep in mind that the oil produced by Perenco and bpTT off the East Coast of Guayaguayare/Mayaro fetches US$1.50 more than the price of Brent.

These prices are higher than the minister’s budget projections of US$52 a barrel for Brent and therefore mean that the companies have to pay a higher than expected windfall tax or supplemental petroleum tax.

With respect to WTI prices on which about 50,000 bo/d is pegged, the prices have also gone past the US$50 a barrel benchmark for the first quarter in the fiscal year and have risen above US$63.90 as of Tuesday.

Minister Imbert will also be pleased that in its most recent short term energy outlook, the US Energy Information Administration (EIA) has increased its forecast prices for both Brent and WTI in 2018 with prices also increasing in 2019.

According to the US, EIA it expects Brent prices to average US$60 a barrel and WTI to average US$55.33 in 2018. The report read, “EIA forecasts the Brent crude oil spot price will average $60/b in 2018 and $61/b in 2019. EIA expects global oil inventories to rise by 0.2 million b/d in 2018 and by 0.3 million b/d in 2019. EIA forecasts the expectation of inventory builds in 2018 and 2019 will contribute to crude oil prices declining from current levels to an average of $60/b during the first quarter of 2018. Prices are then expected to remain relatively flat through 2019.”

The EIA noted that most of the upward price movement in recent months reflects continuing draws in global oil inventory levels. It estimates that global petroleum and other liquid fuel inventories fell by an average of 0.4 million b/d in 2017, which was the first year of annual average draws since 2013.

In addition, oil prices were supported by OPEC’s November 30, 2017, announcement to extend its crude oil supply reduction agreement through the end of 2018.

Also, Brent prices increased in December because of a disruption to the North Sea’s Forties crude oil pipeline system early in the month.

The Forties pipeline system is one of the primary distribution networks for Brent crude oil delivery in the North Sea, and its outage curtailed available supply in the near term.

In spite of the bounce in oil prices, 60 per cent of the revenues that come to the government from the energy sector come from natural gas. The news on prices of natural gas is, however, not as good as oil as prices at the US Henry Hub is expected to actually decline slightly this year when compared with 2017.

The EIA noted that even though the US is expected to export more LNG than ever, prices remain low because of the amount of gas being produced from shale in the US.

The report said, “Henry Hub natural gas spot prices are forecast to average $2.88 per million British thermal units (MMBtu) in 2018 and $2.92/MMBtu in 2019, compared with the 2017 average of $2.99/MMBtu.

“EIA’s forecast for the average Henry Hub price for December 2018 of $3.04/MMBtu should be considered in the context of NYMEX contract values for December 2018 delivery. NYMEX contract values traded during the five-day period ending January 4 suggest that a range of $1.83/MMBtu to $4.89/MMBtu encompasses the market expectation for Henry Hub prices in December 2018.”

What would encourage the finance minister is that the cold Northern Hemisphere winter has led to greater demand for heating and electricity giving rise to higher demand and higher prices, and China’s record importation of natural gas in an effort to reduce carbon emission has also given a rise to LNG prices in Asia.

Local natural gas production is also being ramped up and is at its highest for more than 12 months and this should be sustained through 2018.

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