It’s been a great winter for propane speculators and a decent one for energy equities investors. But all winters must eventually end. And while the speculators can go warm up in the tropics with some of their winnings, those who have bet on drillers might have to do with a spell under a tanning lamp.

The SPDR S&P Oil & Gas Exploration and Production ETF (NYSE: XOP) is up 5 percent over the last three months, using December’s lows as a departure point.  It’s up as much over the last five weeks. On the other hand, it’s merely breaking even for 2014, trailing slightly behind the broader market over that span.

Things could have been worse but they most definitely could have been better too, the more so given recent spikes in energy prices.  These have been rolled back for the moment, with WTI crude dropping back below $100 this week on worries about a slowdown in China and a sizeable build in US inventories, while natural gas is once again below  $4.50 per million British thermal units (mmBtu)  despite heavy demand that has dropped US stockpiles to an 11-year low. 



Natural gas prices are likely to average $4.44/mmBtu this year, right in line with the current spot prices in 2014, according to the latest monthly Short-Term Energy Outlook released Tuesday by the US Energy Information Administration. That actually amounts to a 6 percent markup from February’s forecast. Next year, natgas will be back down to an average of $4.14, the EIA predicts.

The government forecaster also had some troublesome projections for oil-industry investors. But first, the good news: last year, US oil output jumped 15 percent, the biggest gain since 1940. This year, it’s forecast to rise another 12 percent to 8.4 million barrels a day, followed by growth of 10 percent in 2015. At this rate, the domestic production record set in 1970 might fall within three years.



This boom is the handiwork of some our favorite recommendations, prolific explorers and drillers like EOG Resources (NYSE: EOG), Continental Resources (NYSE: CLR) and Whiting Petroleum (NYSE: WLL). But as is often the case with commodities, the great success of individual producers saws the seeds for eventual oversupply and lower prices.

On that score, it’s notable that that the EIA expects that by 2015 surplus crude production capacity controlled by members of the Organization of Petroleum Exporting Countries, primarily Saudi Arabia, will reach nearly 4 million barrels per day, the most slack since 2010, as the Saudis respond to increased US shale output. But even if they hold back the supply, the growth in spare capacity should take a lot of risk premium out of the market.

And that’s before factoring in the possibility of a nuclear deal with Iran and the revival of its energy industry, or the arrival of a Venezuelan government  wishing to competently exploit the world’s largest reserves with foreign investment, which could happen a lot faster than you might think given the economic collapse and violent street protests in that country.    

The EIA’s gradualist approach to forecasting yields an average WTI price of $95 a barrel this year and $90 in 2015. Brent is pegged at $105 for this year and $101 the next. But given the amount of pent up supply that might come online in places eager to harvest petrodollars it’s not hard to conceive significantly lower prices, in fact is much easier to do so than to imagine an upward spiral.

Global demand is rising steadily but not at the rates seen before the Great Recession. Perhaps the most encouraging development on that front was last year’s 2.1 percent jump in US liquid fuel consumption, which was actually significantly higher than the increase of approximately 1.3 percent worldwide.

But this year US consumption is expected to flatline before ticking up 0.5 percent next year. And globally the EIA sees growth at roughly last year’s rate this year and next, effectively keeping pace with demand only because the Saudis can be expected to curb output.

The day before unveiling its monthly outlook, the EIA released the equally useful  Drilling Productivity Report estimating activity and results in each of the major domestic shale basins. It shows the Eagle Ford to be far and away the fastest-growing contributor to the domestic oil boom, surpassing the Bakken sometime in late 2012 and now setting its sights on overtaking the Permian, which should happen quite soon. Eagle Ford production is now increasing by an average of some 30,000 barrels per day (bpd)  each month, while the Bakken is adding perhaps 20,000 bpd monthly. 


Source: US Energy Information Administration

Natural gas production incidental to the oil drilling has also helped the Eagle Ford overtake the declining Haynesville as the second-biggest shale gas producer. But the two combined still don’t add up to the gas output from the Marcellus, which is expected to be up 38 percent year-over-year in April.

The EIA expects US natural gas production to surge 2.5 percent this year and 1.1 percent in 2015. This presumes that the Marcellus will start seeing a slowdown in its growth rate sometime late this year. And in fact the EIA suggests that some output might shift back to the Haynesville as even wider regional differentials penalize Marcellus drillers for their productivity.

One thing’s for certain: energy investors shouldn’t book a vacation with their future gains in mind just yet.