Tuesday, August 1st, 2017

2Q2017 Oil & Gas Market Update

Oil & Gas Market Updates Newsletter SignUpCoachman Energy Operating Company’s Weekly and Quarterly Oil & Gas Market Updates provide an aggregate look at various trends in the oil and gas industry. CEOC and any third parties listed are separate and unaffiliated and are not responsible for each other’s products, services or data. Information is provided for educational purposes only. 

by Randy Kenworthy

Randall Kenworthy2Q17 Market Update Summary

  • Crude oil and natural gas prices trended lower in the second quarter
  • Global crude production remains stubbornly high from growing volumes in the U.S. and those exempt from the OPEC production cut agreement
  • Demand growth picked up from a first quarter lull and is forecast to accelerate
  • Future nature gas demand could push higher with a new wave of industrial demand

Crude oil and natural gas prices trended lower in the second quarter
While crude markets continue to react positively to OPEC’s production cut agreement, resurgent production stateside and those exempt from the agreement tempered most of this benefit, which contributed to a modestly lower crude price during the second quarter. West Texas Intermediate spot moved down by 8.9% during 2Q17 to end the quarter at $46.02. Backdropped by mild weather, ample storage, and stable supply, Henry Hub natural gas spot declined by 4.8% during 2Q17 to close out the quarter at $2.98/MMBTU.

Global crude production remains stubbornly high
Despite efforts by OPEC to limit production growth, global crude production moved up during the quarter. Domestic production is on the rise. The U.S. Energy Information Administration (EIA) estimates that June production in the U.S. hit 9.22 MMBOPD1, up 440,000 BOPD from year-end 2016 levels. Going forward, forecasts are for U.S. production to move higher, driven primarily by Gulf of Mexico and increasing activity in the Permian Basin. The EIA forecasts that production in the four major U.S. shale basins (Bakken, Eagle Ford, Niobrara, and Permian) will rise by a combined 110,000 BOPD from July to August.2 OPEC and others initially counterbalanced some of this growth, but no longer as exempted members Libya and Nigeria continue to pursue production increases. Sequential quarterly production (Q2 vs. Q1) in Libya rose by 8.2% to 710,000 BOPD while Nigeria saw production grow 7.3% to 1.62 MMBOPD.3 This contributed to total OPEC production growing by 115,000 BOPD during the second quarter. This is further confirmed by the International Energy Administration (IEA), which reported that global production rose by 720,000 BOPD in June, with OPEC production up 340,000 BOPD over that time.4 In light of this supply picture and the still elevated level of global inventories, OPEC decided at its May 25th meeting to extend the production cut agreement for an additional nine months, through March 2018.5

Demand growth picked up from a first quarter lull and is forecast to accelerate
Demand growth picked up during the second quarter after hitting a two-and-a-half year low during the first quarter and forecasts call for a much stronger second-half of 2017. The average of the forecasts from EIA, OPEC, and IEA call for a 2017 demand increase of 1.36 million BOPD (up 100,000 BOPD from March averages), with total demand of 97.6 million BOPD.678 Improved demand growth and the potential for some near-term production restraint could maintain relative stabilization in commodity prices and a modest reduction in global inventories as we move into the second half of the year.

Future nature gas demand could push higher with a new wave of industrial demand
We are nearly halfway through the natural gas injection season (typically April 1 through October 31). Inventories at the end of the 2016-17 winter season stood at 2.051 TCF, effectively 427 BCF below last year’s storage levels and 265 BCF above the 5-year average.9 They are beginning to normalize and at the end of June storage stood at 2.888 TCF, 285 BCF below last year’s storage levels but importantly also narrowed to 187 BCF above the 5-year average.10 Demand for power generation is running below last year’s levels. We are seeing some of the slack picked up by other demand drivers, notably material demand from exports to Mexico as well as new liquefied natural gas (LNG) exports. It appears that future demand could push higher still with a new wave of industrial demand in its infancy. Cost-effective supply (mostly ethane) has led to investment in new U.S. petrochemical projects. According to the American Chemistry Council, about 310 projects totaling roughly $185 billion are in construction or planning.11

Conclusion
Coachman Energy Operating Company believes crude pricing may remain around current levels over the near-term given rising demand and muted production growth. Clearly, participant adherence to OPEC’s production cut agreement has helped, but more must be done. We maintain our position that it will still take time for the current inventory oversupply to fully balance and normalize. Wildcards remain and bear repeating. What will OPEC do with exempt members Libya and Nigeria? Will the OPEC agreement remain intact if more members effectively cheat by not complying with their quotas? This will all play out in the coming months. Will U.S. shale continue to rebound or will it plateau? Will demand growth accelerate over the third and fourth quarters as forecasted, particularly in China and India? Answers to these questions, among others, will likely hold the key to how the oil and gas markets continue to unfold over the second half of 2017.

 

[1] Short-Term Energy Outlook, Energy Information Administration, 7/11/17
[2] Drilling Productivity Report, Energy Information Administration, 7/17/17
[3] Monthly Oil Market Report, Organization of the Petroleum Exporting Countries, 7/12/17
[4] Oil Market Report, International Energy Administration, 7/13/17
[5] OPEC 172nd Meeting concludes, Organization of the Petroleum Exporting Countries, 5/25/17
[6] Short-Term Energy Outlook, Energy Information Administration, 7/11/17
[7] Oil Market Report, International Energy Administration, 7/13/17
[8] Monthly Oil Market Report, Organization of the Petroleum Exporting Countries, 7/12/17
[9] Natural Gas Weekly Update, Energy Information Administration, 4/13/17
[10] Weekly Natural Gas Storage Report, Energy Information Administration, 7/7/17
[11] The Shale Revolution’s Staggering Impact in Just One Word: Plastics, Wall Street Journal, 6/25/17

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