Crude oil moves up while natural gas prices trend modestly lower in the third quarter
Global crude production remains stubbornly high from growing volumes in the U.S. as well as those exempt from the OPEC production cut agreement
Demand growth picks back up and is forecast to accelerate into year-end
Inventories across the globe have begun to inch down, but inventories in the U.S. remain stubbornly elevated
Crude Oil Moves Up While Natural Gas Prices Trend Modestly Lower
The crude oil and natural gas markets diverged somewhat during the third quarter. Crude markets firmed up as global data became increasingly supportive of declining global inventories. However, continued resiliency in U.S. production and those exempt from the OPEC agreement remain a near-term challenge in fully balancing supply and demand. Meanwhile, natural gas was little changed during the quarter as ample supply and tempered demand from mild weather kept prices in check.
The third quarter can be characterized as one with improving supply-demand fundamentals for crude. This contributed to a better near-term outlook and higher crude price during the period. West Texas Intermediate spot gained 12.3% during Q3’17 to end the quarter at $51.67.
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 September production in the U.S. hit 9.34 MMBOPD, up 570,000 BOPD from year-end 2016 levels, and is forecast to surpass 10 MMBOPD by late-2018. Driving these U.S. production growth forecasts are gains primarily out of the Gulf of Mexico and the Permian Basin in West Texas. The EIA forecasts that production in the seven major U.S. shale basins (Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara, and Permian) will rise by a combined 81,000 BOPD from October to November, with over 60% of the growth coming from the Permian alone. Despite historically high compliance with the OPEC/Non-OPEC production cut agreement, exempt members are more than offsetting attempts to curtail global production. Sequential quarterly production (Q3 vs. Q2) in Libya rose by 31.5% to 932,000 BOPD while Nigeria saw production grow 11.4% to 1.79 MMBOPD. This has contributed to total OPEC production growing by 453,000 BOPD during the third quarter. Crude supply remains above demand needs, but is narrowing as supplies are restrained and demand growth picks up. In fact, the International Energy Administration (IEA) forecasts the 2018 “markets look broadly balanced, assuming OPEC holds output steady at around current levels.”
Demand Growth Picks Back Up
Demand growth continues to pick up and remains a bright spot in the improving outlook for supply and demand balancing. The average of the forecasts from EIA, OPEC, and IEA call for a 2017 demand increase of 1.47 million BOPD (up 110,000 BOPD from June averages), with total demand of 97.6 million BOPD.,, Improved demand growth and the potential for prolonged restraint in near-term production could maintain relative stabilization in commodity prices and a modest reduction in global inventories as we move through the last quarter of the year and into 2018.
Meanwhile, domestic natural gas markets were little changed during the third quarter as mild weather, ample storage, and renewed growth in supply countered solid demand and prevented a possibly rally. Henry Hub natural gas spot declined by 1.3% during Q3’17 to close out the quarter at $2.94/MMBTU.
The natural gas injection season (typically April 1 through October 31) is nearly complete. 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. Storage levels have normalized and at the end of September stood at 3.508 TCF, 161 BCF below last year’s storage levels but importantly also 8 BCF below the 5-year average. Natural gas supply is picking back up, in no small part from associated gas produced from oil wells as well as a resurgence of the Haynesville in East Texas and Northern Louisiana. On the demand side of the equation, the market continues to see a strong pull from exports to Mexico as well as liquefied natural gas (LNG) exports. It appears that future demand could push higher still with a new wave of industrial demand in its infancy as well as new LNG facilities. On the industrial demand side, ExxonMobil recently announced that it had commenced production on the first of two new lines at its plastics plant in Mont Belvieu, Texas. On the LNG front, the first of these new projects, Cove Point on the Chesapeake Bay in Lusby, Maryland, is expected to be in-service before the end of the year. It would join Sabine Pass as the second large-scale liquefaction export facility to begin operations in the Lower 48 states and the first on the East Coast.
Coachman Energy Operating Company believes crude pricing may remain around current levels over the near-term given rising demand and muted production growth. We continue to maintain our position that it will take more time for the current inventory oversupply to fully balance and normalize. As always, wildcards remain and some bear repeating. Will geopolitical risks in Iran, Iraq, or Venezuela among others boil over and impact global supplies? What will OPEC do with exempt members Libya and Nigeria? Will OPEC extend their agreement for a second time when they meet in late-November? Will U.S. shale continue to rebound or will it plateau? Answers to these questions, among others, will likely hold the key to how the oil and natural gas markets continue to unfold over the final months of 2017 and as we move into 2018.
Short-Term Energy Outlook, Energy Information Administration, 10/11/17 Drilling Productivity Report, Energy Information Administration, 10/16/17 Monthly Oil Market Report, Organization of the Petroleum Exporting Countries, 10/11/17 Oil Market Report, International Energy Administration, 10/12/17 Short-Term Energy Outlook, Energy Information Administration, 10/11/17 Oil Market Report, International Energy Administration, 10/12/17 Monthly Oil Market Report, Organization of the Petroleum Exporting Countries, 10/11/17 Natural Gas Weekly Update, Energy Information Administration, 4/13/17 Weekly Natural Gas Storage Report, Energy Information Administration, 10/5/17 ExxonMobil Begins Production on New Polyethylene Line at Mont Belvieu Plastics Plant, ExxonMobil, 10/17/17 Natural Gas Weekly Update, Energy Information Administration, 8/10/17
Coachman 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.