DALLAS–Oil prices likely have two strong quarters ahead but, like natural gas, crude is essentially range-bound in the near term, Anthony Yuen, global energy strategist for Citigroup, said Oct. 12 at Oil and Gas Investor’s A&D Strategies & Opportunities Conference.

Citigroup forecast fourth-quarter 2017 Brent prices at $58 per barrel (bbl) and West Texas Intermediate (WTI) at $54—a divide that U.S.-based E&Ps have previously taken advantage of in the global export market. After that, prices will decline, Yuen said.

Additionally, NGL prices will continue to fluctuate greatly due to the tug-of-war between supply and demand, he said.

“NGL is something that we like a lot, but it is a market where you cannot control your own destiny,” he said. NGL pricing varies greatly because they’re dependent on oil and gas fundamentals for supply and while Asian and European fundamentals govern demand.

“It’s not really controlled in the U.S.,” he said. “So that’s why we see a lot of volatility and also how we’ve seen propane prices really shoot up 30% or more in just two months.”

After a couple of quarters, Yuen sees prices beginning a retreat, despite any global instability in typically tumultuous OPEC countries such as Venezuela, Iraq and Iran.

“What we are seeing is inventory is strong, withdrawals are strong, refining margins are great so it makes for a bullish market,” he said. But, by 2019, oil will enter a softer price environment with Brent prices dipping to $49/bbl and WTI to $45.

Yuen said strong production from North America, offshore platform production and Canadian oil sands volumes will make the market looser in 2019. U.S. shale producers also continue to be among the strongest influencers of price.

“We are just amazed how strong your colleagues and others in the shale locations are producing,” he said.

Still, Yuen isn’t as optimistic as others, including the Energy Information Administration, about shale’s ability to grow production on the order of 1.2 MMbbl/d to 1.5 MMbbl/d—although 900,000 bbl/d is feasible.

But, either way, the markets are poised for a quick uptick as the past few months of shale production have disappointed the market. That’s despite shale in most plays being profitable at $40 WTI.

“If they continue to disappoint while OPEC really holds the line and keeps on cutting… that would make for a more tightening market,” Yuen said.

“Of course, the reverse is possible,” he added.

Permian Power

Shale production’s larger role in the markets is yet to come, though.

As non-OPEC production declines, OPEC itself could grow production by up to 3 MMbbl/d, Yuen said.

“But our shale outlook is much more optimistic,” he said. At some point, shale production may become the barometer for the production needed to balance the market.

Although, as Yuen has watched shale companies react to price rebounds, he said he’s found that “based on empirical evidence it looks like a three-month lag time between price moves and rig turns.”

The difference between a $40 WTI price and a $50 price is an additional 1 MMbbl/d growth. But as prices rise, that production growth begins to lessen.

At $50 to $60, “yes, you see some additional production, but then that … gets smaller and smaller,” Yuen said. That growth could be further impacted by inflationary costs, such as oilfield service fees.

The Permian Basin will lead production gains and faces no real takeaway capacity constraints below $60/bbl.

“There’s sufficient pipeline capacity to take the oil out of the Permian all the way to 2021,” he said.

Natural gas is a different story. Slow midstream development for associated gas could see the Permian supplying a $3 natural gas market with a $0.50 or even $0.70 differential, robbing companies of gas side cash flow.

For crude production, Citigroup sees the potential for pricing to be set by a “call-on-shale” and shale’s response. The question will be “how much shale do we need to balance the market,” Yuen said.

Relief Valve

In the sea of variables that make up oil and gas price forecast, Yuen said one major mystery has been overlooked.

Despite crude oil cuts by OPEC and U.S. shale production falling slightly short of its production goals, it’s an outside player keeping oil markets in balance: China.

China has purchase excessive amounts of crude oil—more than it needs, Yuen said.

The International Energy Agency (IEA) annually reports a certain amount of miscellaneous or “missing” oil—most recently about 500,000 bbl/d. The agency has faced criticism for its estimates with accusations of simply getting the number wrong.

Yuen argued it is no mistake.

“The notion of the missing oil problem is where China has been importing more than it needs,” he said.

The anomaly is magnified by a Chinese market that doesn’t appear to need the oil—yet. “If China did not import that, the market would be oversupplied by a half a million barrels a day earlier this year,” he said, adding that IEA’s “missing oil” may climb this year to 1 MMbbl/d.

“So they’re pouring more into their strategic storage and commercial storage,” he said.

The reasons may be obscure. Though, Yuen sees them as perhaps more clear-cut: China is buying opportunistically with its eye on a future in which it ratchets up refined products or uses it themselves.

“We’re not seeing indicators of that yet,” he said. “But given the strong refining margins globally right now and China getting excess refining capacity,” the country may be poised to make its own exportable products without having to buy feedstock from other suppliers.

Darren Barbee can be reached at dbarbee@hartenergy.com.