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By Robert Rapier on Dec 20, 2014 with 11 responses

Five for Five in 2014

As the year expires and the new year arrives, there are several topics I like to cover in a series of articles. One is to review the top energy stories of the year. Another is to grade my predictions for the year. And finally, I lay out my predictions for the upcoming year.

Usually I have a dilemma of whether to grade my predictions first, or to lay out the energy stories first — because I normally do both stories at the end of the year, and something could potentially happen right at the end of the year that might change the narrative. For example, I might do the top energy stories this week, but what if something monumental happens in the next two weeks? The other option is of course to wait until after the first of the year, but then that delays my predictions.

This year, however, there isn’t much of a dilemma on which story to do first. I can grade my 2014 predictions at this point with a high level of confidence.

I laid out these predictions in a January article called My 2014 Energy Predictions. I generally make five predictions, and outline the context for these predictions. I make predictions that are specific, measurable, and in most cases actionable. My five predictions for 2014 (without the context) were:

  1. The crude oil export ban will not be lifted in 2014.
  2. Brent and West Texas Intermediate (WTI) crude prices will average less in 2014 than in 2013.
  3. The average Henry Hub spot price for natural gas will be higher in 2014 than in 2013.
  4. US crude oil production will expand for the sixth straight year.
  5. KiOR will declare bankruptcy in 2014.

So how did I do? Not too bad.

1. The crude oil export ban will not be lifted in 2014.

The U.S. has had a ban on crude oil exports that dates to the the Energy Policy and Conservation Act (EPCA) of 1975. Although there are no restrictions on the export of refined products like gasoline and diesel, crude oil exports to all countries besides Canada are effectively banned. Because of the surge of U.S. crude oil production over the past five years, crude oil producers have been lobbying for the export ban to be lifted. The notion of exporting oil might seem far-fetched given that the U.S. is still a significant net crude oil importer, but there are two factors that have pushed the industry to seek change.

The first is that much of the new oil production is too light for many U.S. refineries. These refineries have been retooled to handle much heavier crudes, so the market for the new oil production in the U.S. isn’t as great as it might appear at first glance. This has led to deep discounts on this crude relative to international markets. Second, the U.S. could at least hypothetically become a net crude oil exporter if the rate at which it has recently been increasing oil production continued for the rest of the decade. (Current U.S. government projections predict a significant slowdown in production growth over that period, a scenario has become much more probable recently with the drop in crude prices.)

Lifting the ban has great support in the oil production industry, but much less so among refiners, who enjoy buying the discounted crude and making fatter margins on the gasoline and diesel they sell. A number of politicians in oil-producing states have sided with the drillers. Energy Secretary Ernest Moniz has also said that the ban should be revisited. Two Republican House members from Texas, Joe Barton and Michael McCaul, have both introduced legislation to lift the ban. In the Senate, Lisa Murkowski (R-Alaska) has pressed the issue.

But the only real chipping away at the ban took place when Pioneer Natural Resources (NYSE: PXD) and Enterprise Product Partners (NYSE: EPD) received a ruling from the Department of Commerce that stabilized condensate is considered to be a refined product rather than crude, and refined products may be exported without running afoul of the crude oil export ban.

So, this prediction was completely correct. Despite a lot of press, the crude export ban remains in place, and it won’t be overturned by year-end.

2. Brent and West Texas Intermediate (WTI) crude prices will average less in 2014 than in 2013.

For the first half of the year, it really looked like I was going to get this one wrong. My reasoning was that the flood of new U.S. oil production that first overwhelmed demand in the U.S. Midwest and resulted in sometimes deep discounts there, and that ultimately worked its way to the Gulf Coast, would continue to push out imports, increasing global oil supplies by displacing oil that the U.S. had been importing. Oil supplies were growing faster than demand for a change, and I felt that had to put downward pressure on prices.

According to the Energy Information Administration (EIA), in 2013 Brent crude averaged $108.56/barrel (bbl), while the average price of WTI was $97.98/bbl. Brent crude did trade down from that price for most of the year, but through the end of July WTI averaged a bit higher at $101.43/bbl. Even though I felt like the oil markets were being irrational, I had to concede that the price would really have to drop a lot in the remaining five months of the year to salvage this prediction. Well, as you know, a funny thing happened. On July 31 the price of WTI dropped below $100/bbl, and the price has been in free-fall since. Recently the price of WTI broke below $60/bbl, a five-year low.

So through Dec. 19th, the average closing price of WTI is now down to $94.42/bbl year-to-date. It is theoretically still possible for me to be wrong on this prediction, but oil would have to return to well above $100/bbl for the rest of the year. That’s not going to happen. The average price of Brent YTD is $101.15, $7.41 below last year’s average. That would also take a miraculous turnaround in price for my prediction to go wrong.

If something crazy happens and oil shoots back up over $100/bbl in the next few days, I will come back and recheck the numbers at the end of the year. But this prediction looks pretty safe at this point.

3. The average Henry Hub spot price for natural gas will be higher in 2014 than in 2013.

I made this prediction on the basis of long-term natural gas fundamentals. A year earlier I also correctly predicted higher natural gas prices for 2013, but natural gas prices can always be overwhelmed in either direction by short-term weather events. In early 2014 that short-term weather event happened to be a series of polar vortices that gave us the coldest winter in many years. So, after averaging $3.73/million British thermal units (MMBtu) in 2013, through Dec. 19th the 2014 average daily close has been $4.41/MMBtu. At this point, this prediction would be correct even if natural gas prices went to zero for the rest of the year.

4. US crude oil production will expand for the sixth straight year.

The 7.4 million barrel per day (bpd) average U.S. oil production in 2013 already represented a nearly 2 million bpd increase over the previous two years, which was the fastest rise in U.S. history. But unless oil prices totally collapsed, I felt like it was a pretty sure bet that we would again see another decent advance in U.S. oil production. The final monthly numbers aren’t published until two to three months after the fact, but through September U.S. oil production has averaged 8.4 million bpd in 2014, and each month had higher production than the previous month. In order for this prediction to be wrong, the final three months of the year would have to come in at 4.2 million bpd. Production may pull back a bit as a result of the plunge in oil prices, but it won’t pull back that far, that rapidly. This prediction is safe.

5. KiOR will declare bankruptcy in 2014.

KiOR — which had traded on the Nasdaq as KIOR — was one of three advanced biofuel companies that venture capitalist Vinod Khosla took public in 2011. I was a vocal critic of the frequent overpromises of the company because I understand the technical challenges of their approach, and many of their claims didn’t ring true with me. And despite the rosy promises, the company consistently failed to deliver on its promises to investors. KiOR was a central topic in a 60 Minutes report in January — The Cleantech Crash — in which Lesley Stahl interviewed Vinod Khosla and me. Khosla poured on more pie-in-the-sky and claimed there was no downside to the technology, while I laid out the technical and economical challenges that the company faced, and said that Khosla was over his head in the advanced biofuels business.

The interview actually took place in November 2013, and I told Lesley Stahl then that the company was destined for bankruptcy. That comment didn’t make it on air, but I made the prediction official in a column in January 2014.

I did warn on several occasions that Khosla had his credibility really on the line after previous failures in this space, and he was likely to throw the company a lifeline for a while. But I reasoned that his patience would wear out before year end. Indeed, the company was essentially out of money in April, but Khosla loaned them enough money to get them into fall. And with no real prospects of getting the plant operating properly and producing cost-competitive fuel, Khosla did in fact lose patience and stopped loaning them money. KiOR was delisted from the Nasdaq, and declared Chapter 11 on Nov. 9 after accumulating losses of $629.3 million and revenues of just $2.25 million. The loss for equity investors was total.

Conclusions

 

Barring some really spectacular events in the oil markets, this year I will be 5 for 5 on my predictions. To be clear, that’s pretty unusual. There are just so many variables in the energy markets, that it is a real challenge to be consistently correct on the direction of prices. This is why I strive to provide a lot of context around my predictions. If market conditions start to change, investors can adjust accordingly. For example, if I predict lower oil prices, but then OPEC slashes production in the middle of the year — you need to understand in that context that prices are probably headed higher, despite my prediction.

Predicting 2015 is going to be a bigger challenge, with much more uncertainty. Nevertheless, I will soon attempt it.

Link to Original Article: Five for Five in 2014

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By Russ Finley on December 21, 2014 at 11:29 pm

    What will make 2015 a bigger challenge? Republican control of the senate?

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    • By Robert Rapier on December 21, 2014 at 11:46 pm

      The price direction for oil and gas is a lot blurrier for me this year. I will have less confidence in those predictions. I also don’t have a KiOR-like prediction. Yes, Republican control will also complicate the issue. Can they pass Keystone pipeline legislation, and if they do will Obama veto it? So lots of questions this year rattling around. Plus, going 5 for 5 isn’t easy under even the best circumstances.

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  2. By Paul on December 22, 2014 at 8:54 am

    Congratulations to 2014 5 for 5. Few suggestions for 2015 predictions…RFS2 survival…would cellulosic ethanol become cost competitive…is going fuell cell car take over electric in US (probably too early)…would DME, CNG as “new” fuels play significant role in US transportation…Thank you again for very interesting articles in 2014, all the best in 2015! Paul

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  3. By Philip A. Rutter on December 22, 2014 at 3:23 pm

    Robert- First Rate. Better, actually. :-) You may be in a position to push for a concept I’ve tried to promote for several years- why, oh why- does no one TRACK the prediction success rates for all the various pundits and experts? A) Yes, it would make you hugely unpopular. But B) the readership for any entity doing such tracking would skyrocket. C) Such tracking would provide a genuine service to investors and everyone else. And D) – um – “ratings” agencies are VERY profitable businesses. (yes, I expect a 1% cut of all profits in perpetuity from anyone founding such a business based on this comment.) :-) Mele Kalikimaka.

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  4. By DANSHANTEAL on December 25, 2014 at 2:37 pm

    Turmoil. such as we have seen this year. can only produce uglier instability. Putin will turn on the West, invade Ukraine and start a war with the NATO (meaning the U.S.). It’s 1938 all over again and Obama will lose his head over it.

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  5. By Noah on December 26, 2014 at 12:41 pm

    Robert –
    I’ve followed your blog on and off for years beginning when I was a profession trader in the energy markets. Overall good job though I have to call you out on a glaring omission in these “predictions”, most notably so in the case of the nat gas prediction.

    “Predicting” that avg natural gas prices would be higher in 2014 vs 2013 at the end of 2013 was an obvious no brainer – given that the avg for 2013 was $3.70ish and the spot price at the end of the year was already in the $4.30′s. So, a safe prediction given that it started with a 60ct head start. Considering that the market is now at $3, spot prices about ~30% lower since the beginning of the year, I question the value of a technically correct “prediction” of such obvious nature given where prices were at the end of December last year.

    I can say the same about your oil predictions for last year but at least there the direction of the market matches – though this was again something that anyone paying attention to the fundamentals would have been looking for for a long time, though admittedly the timing is always difficult.

    Also worth pointing out the above doesn’t take into account whatever the futures curve may be indicating, which I no longer have a good view of.

    Similarly, it is obvious given that wti averaged in the $90s for 2014 I therefore predict that wti prices will have a lower avg pric in 2015. Though, again, this is not saying much. Much more worthwhile would be a view on the direction of oil prices from now through the end of next year, which is clearly the more difficult and less obvious call to make, though given the magnitude of the break we’ve seen perhaps the safe bet is to argue prices may rise a bit now through the end of next year, but again, not an obvious one.

    Best, and happy holidays!

    Noah Singer

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    • By Robert Rapier on December 26, 2014 at 12:54 pm

      “I can say the same about your oil predictions for last year but at least there the direction of the market matches…”

      Noah, that’s just the thing. These things always become obvious in hindsight. Had the oil crash happened a few months later, I would have been wrong on that. Had the winter weather ended a few weeks earlier, I could have easily been wrong on the gas prediction. Gas is down over a buck in the past month. That prediction was influenced by where gas inventories were, and not where gas ended the year.

      No doubt I am playing the odds as best as I can, and where the price is can make a difference on the direction of the prediction. Gas prices weren’t as high as I thought they would be by mid-summer, but that’s a testament to a mild summer and full out production. That latter I expected, the former I didn’t give much chance of happening.

      I have my gas prediction ready for 2015. Is it obvious to you the direction relative to 2014? Maybe when I make the prediction you can tell me that it’s obvious, but will you come back at the end of the year and answer for it if it’s wrong? I will.

      You have seen how quickly prices can collapse. Look at oil. Mid summer it was obvious I was going to be wrong about that prediction, and look what happened. So these “no-brainers” only become so in hindsight. It was obvious to me that the Cowboys would demolish the Buffalo Bills when they played them in the Superbowl back when they were really good, but a lot of people still bet on the Bills.

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    • By Robert Rapier on December 26, 2014 at 12:56 pm

      Oh, and this: “Similarly, it is obvious given that wti averaged in the $90s for 2014 I therefore predict that wti prices will have a lower avg pric in 2015.”

      To me, that’s a really obvious prediction. But that won’t be the prediction I will be making. I will be making a prediction of a price relative to year end prices, and it is contrary to what some brokerage firms say. I will outline the reason for the prediction.

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  6. By Forrest on December 27, 2014 at 8:57 am

    Based on the environmental agenda on Embridge pipelines, i would suggest to predict no XL construction permit. The Left is going bonkers on the dangers of pipeline spill to environment. They want legislation to require owners to put up $billions within trust fund for eventually spill, in which they want control of spending. NPR interview with well funded opposition cited the agenda was to kill financial incentives to fund pipeline construction. They will take the money out of such investments and dry up efficient oil transports. The environmentalist claimed a pipe line leak within the 60 yr old pipeline crossing Lake Michigan waters would be exponentially more expensive as compared to the $billion dollar cleanup upon Kalamazoo River spill. They are motivated energized and totally committed to destroy oil industry within U.S.. I believe they have the power to do so. Living close to the river spill, I was amazed of the power within government wrapped within protective cocoon of politics, agenda, and money grab. How the media was controlled as well as access to the damage. Media and lawyers, hyped up populace to inflict max damage assessment and time to clean up. It was laughable, but realize the politics of this when fully one half of the country will only go about the work of propagandizing and reinforcing each other’s story of woe. It is scary, when the country needs good governance and intelligent decision making.

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