Energy markets balance — eventually. In the midst of the turmoil we’ve experienced this year, there have been periods when it seemed like markets were going to hit the wall. But even with the historic WTI oil price glitch on April 20, the physical crude oil markets continued to function. That’s the way it is supposed to work, and it’s good news. The bad news is that figuring out how these markets are balancing in these volatile conditions can be challenging if not downright perplexing. Nowhere is that more true than the market for U.S. propane. Production is down, but so is demand. Inventories are up, and so are prices. Propane continues to be exported, even though global demand has been whacked by COVID. In today’s blog, we explore these developments and put the spotlight on RBN’s NGL Voyager, our subscriber report and data service that we have just reformatted, upgraded and generally reconstructed to meet the information needs of today’s NGL marketplace.
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Daily energy Posts
During the last two weeks of April, a barrel of propane in Mont Belvieu was more expensive than a barrel of WTI crude oil in Cushing. That’s never happened before. You might think that such an aberration could be blamed on the wacky April-May 2020 COVID crude market, but that is only part of the story. Propane production is falling and pre-COVID projections of continued supply growth are out the window. But new gas processing plants, pipelines, fractionation facilities, dock capacity and downstream demand have come online in recent years, in anticipation of those ill-fated additional supplies. Already we are seeing flows, price relationships and differentials convulsing in response to the new reality, and projections of future supply/demand imbalances suggest a previously unthinkable possibility: a market that can’t get enough propane supply, especially if the winter of 2020-21 is a cold one. In today’s blog, we will explore the evidence of these market developments that is already visible and look to what may be ahead for propane supply and demand.
On April 20, that fateful day in crude oil markets when the CME May contract for WTI at Cushing collapsed to negative $37.63/bbl, the number of contracts involved in the chaos was relatively small. So you might think that most producers sat on the sidelines, watching Wall Street paper traders writhe in stunning financial pain. But not so. Almost all producers saw their crude prices that day crashing in exactly the same magnitude. That’s because the daily price of the CME WTI contract is part of the formula pricing used in a very large portion of crude oil contracts in U.S. markets, both directly and indirectly. There are two formula mechanisms that are commonly used in crude oil sale/purchase contracts that are responsible for that linkage: the CMA and WTI P-Plus. These arcane pricing mechanisms are complicated, but in order to understand U.S. crude markets, it is critically important to appreciate how they work. Today, we continue our deep dive into crude oil contract pricing mechanisms.
The Bakken Shale is being hit especially hard by production cuts this spring. Crude oil-focused producers large and small have been shutting in wells and putting well completions on hold, slashing daily crude output by more than one-sixth. The rig count is down by half in less than two months — to 26, the play’s lowest level since mid-2016 — and thousands of oilfield workers have been let go. All this is happening despite the facts that the Bakken’s four-county core has some of the best shale assets outside the Permian and that in 2017-19 the play was super-hot, with crude production increasing by 50%. That three-year growth spurt spurred the development of a number of new crude gathering systems, many of which now face a period of significant underutilization. Today, we discuss highlights from our new Drill Down report on oil production and supporting infrastructure in the U.S.’s #2 shale play.
The COVID-19-induced social isolation and subsequent economic slowdown have caused major drops in U.S. refined products consumption, especially gasoline and jet fuel, which have experienced declines of as much as 44% and 70%, respectively, relative to similar periods in 2019. Diesel fuel consumption has been off as much as 20% on the same basis, and given that COVID is a global crisis, product exports have also fallen. As a result, U.S. refinery utilization has dropped to less than 70% for the last few weeks, the lowest levels since September 2008 during Hurricane Ike. All this presents refiners with two challenges: (1) reduced total demand; and (2) the disproportionate decline in gasoline and jet fuel. Each refinery is configured differently and has a varying degree of flexibility to react to these challenges. Today, we discuss what refiners can do to adjust operations and product yields, and examine the point at which some refineries might be forced to shut down completely.
The initial start-up of Cheniere Energy’s Midship Pipeline two weeks ago occurred in a radically different market environment than when the project was conceived. As the first greenfield, large-diameter natural gas pipeline project out of the SCOOP/STACK in years, it was meant to provide relief for the once takeaway-constrained producers in the Central Oklahoma production region and connect what was until the past year a rapidly growing supply region to emerging LNG export demand along the Gulf Coast, including at Cheniere’s own Corpus Christi, TX, terminal. Instead, SCOOP/STACK production hit the skids last fall, and rig counts since then have plunged to the lowest levels in well over a decade. On the delivery end of the pipe, U.S. LNG export demand is being challenged by a global gas glut and disappearing margins to international markets. Still, the Midship project’s initial capacity of 1.1 Bcf/d is more than 80% subscribed by firm shippers, and the new pipeline is slated to provide some of the most economic routes out of the SCOOP/STACK. Today, we provide an update on the project’s start-up and the changed market environment it’s facing.
Well, it’s happened. The first signs of crude oil and gas production curtailments in the Permian Basin materialized over the weekend. That has followed weeks of extreme oversupply conditions, growing storage constraints and distressed pricing, all to deal with the abrupt and unprecedented loss of refinery demand for crude oil due to COVID, not just along the Gulf Coast, where the lion’s share of the U.S. refineries sit, but also more locally in West Texas. The rapidly shifting supply-demand balance, first from reduced local refining demand and now also the emerging production cuts, is adding volatility to the spreads and flows between the West Texas basin’s regional hub at Midland, and downstream hubs at Cushing and Houston. Today, we look at how the Midland market has responded to the downturn in local refining demand, and how production losses will factor into the balancing act.
With a dwindling market for their crude, many U.S. producers are confronting an unavoidable choice: shutting in existing production. Just go out and flip a switch and turn a valve, right? Wrong. Like everything else in the COVID era, shutting in production is complicated. It is the alternative of last resort for producers, whose primary directive is the economic extraction of oil and gas. But with demand for their products crushed, production from some wells no longer makes economic sense. Unfortunately, the process of shutting in wells is charged with contractual, economic and operational issues that the industry is scrambling to deal with. The situation is fraught with uncertainty, and many producers’ futures depend on how decisively they manage the shut-in process. Today, we discuss the urgent need to reduce oil production and the judgments producers will be making as they take wells offline.
Significantly reduced demand for crude oil by refineries is spurring production cuts in Alberta’s oil sands, and that could lead to a major decline in demand for Western Canadian natural gas. The oil sands are the single largest consumer of natural gas in Canada, accounting for more than half of the gas used in Alberta year-round and up to 37% of the gas used nationwide. With that kind of clout, anything that affects gas consumption in the oil sands is bound to have an outsized impact on the Alberta and overall Canadian natural gas markets. Today, we conclude our series on the effects of COVID-related disruptions on the Canadian natural gas market.
The global economic shut-down caused by COVID continues to wreak havoc on U.S. markets. Last week, the dynamics that resulted in negative prices for NYMEX WTI thrust crude oil, and, more specifically, storage at Cushing, OK, into the national spotlight. The extraordinary imbalance in U.S. crude oil supply and demand has been pushing record volumes of oil into storage at the Cushing crude hub and tankage along the Gulf Coast. The same fundamental factors have also driven a surge in stocks of refined products like gasoline and diesel. Now the questions on everybody’s mind are, how long until storage tanks are completely full and what will that mean? Today, we’ll discuss recent trends and consider what record storage builds mean for the oil patch.
The crude oil market garners all the headlines in the COVID/OPEC+ era, and understandably so. But the NGL market is also in turmoil and deserves attention too. Declining volumes of associated gas from crude-focused plays will soon be cutting into NGL supplies. Demand for natural gasoline has been hit hard, along with the crude, motor gasoline and jet fuel markets. But propane prices relative to crude oil have soared to historically high ratios, in part reflecting recent strong international demand for U.S. LPG exports. As for ethane — the lightest NGL, and the most important feedstock for the Gulf Coast petchem sector — it is going through wrenching changes, with major implications for both suppliers and steam crackers. Today, we begin a short series on the major dislocations that crude-market chaos is spurring in NGL production, ethane rejection, feedstock selection by steam crackers, and ethane/LPG exports.
The market’s spotlight in recent days has been on negative prices for both Permian crude oil and natural gas, but in the shadows a powerful rally has taken place in the forward market for Permian gas at the Waha hub. Much of this month’s price weakness for gas in West Texas has been driven by pipeline maintenance. But the Waha forward curve indicates market expectations for higher prices in May, and the possibility of a summer in which Permian gas prices could be some of the strongest on a consistent basis since negative pricing first appeared in the basin back in 2018. Today, we dive into the drivers behind the rise in forward Permian gas prices.
COVID-related demand destruction and the oil price meltdown have engulfed energy markets and companies in a thick, pervasive shroud of doom and gloom. But investors and analysts have hit upon a potential bright spot for one segment of the industry: Gas-Weighted E&Ps that had been battered by the decade-long shift of upstream capital investment to crude-focused resource plays. The massive cutbacks in 2020 capital investment by oil producers triggered by the recent, dramatic decline in refinery demand for crude will reduce not only oil output, but associated gas production as well. That drop in supply raises the prospect of meaningful increases in natural gas prices in 2021 –– hence Wall Street’s new interest in Gas-Weighted producers, whose equity values have taken off in recent weeks after a big plunge earlier this year. There’s a lingering concern though, namely that LNG exports — a key driver of gas demand for U.S. producers — may be slowed by collapsing gas prices in key international markets. Today, we discuss what’s been going on.
On Monday, front-month WTI at Cushing cratered to a negative $37.63/bbl. On Tuesday, the same futures price rose by nearly $48 to close at about $10/bbl — a positive $10, that is. As for WTI to be delivered in June, it lost well over a third of its value on Tuesday, ending up at less than $12/bbl, but over the past two days it has roared back to over $16/bbl. No doubt the WTI futures market will see more wild times in the days and weeks ahead as traders look to avoid the traps that ensnared the market as the May contract approached expiry. If there’s a lesson to be learned from the past week, it’s that it really helps to understand the ins and outs of the futures market — especially when it is so volatile. Perhaps the most important thing to wrap your head around is that while the futures market mostly involves financial players who will never take physical delivery of oil, the two markets — financial and physical — are fundamentally linked. Prompt-month futures converge on spot prices over time, while physical contracts are settled in part based on NYMEX futures, so producers will feel the sting of Monday’s negative prices when physical April deliveries are invoiced. Today, we begin a two-part blog series examining U.S. spot crude pricing mechanisms.
Sharply declining refinery demand for crude oil was a key driver in the historic collapse in near-term futures prices for WTI at Cushing earlier this week. With stay-at-home directives in place in most of the industrialized world, U.S. — and global — demand for motor gasoline and jet fuel has plummeted to levels not seen in decades. These changes in refined-products demand, which may continue for months, already are having significant impacts on U.S. refineries — not just in how much crude oil they need but in operators’ decisions on whether to adjust their crude slates and ramp down or alter their operations. Their urgent challenge is to revise their yields to something close to the appropriate volumes of gasoline, diesel and jet fuel. Today, we begin a blog series on the U.S. refining sector and what refiners can — and can’t — do to adapt to these extraordinary times.
Underlying Monday’s financially driven oil price rout are physical markets that are in extreme turmoil as they contend with severely reduced demand resulting from the COVID lockdowns and rapidly filling storage tanks. In the Permian Basin, the epicenter of U.S. shale oil, the crude benchmark price — WTI at Midland — on Monday crashed to a historical low of negative $13.13/bbl before rebounding to a positive $13.01/bbl Tuesday. The same day, prices at the Permian natural gas benchmark Waha revisited negative territory for the third time this month, with a settle of minus $4.74/MMBtu for Tuesday’s gas day. Negative supply prices aren’t new to Permian producers, at least for gas — Waha settled as low as minus-$5.75/MMBtu in early April 2019. But up until a couple months ago, oil prices were supportive enough to keep producers drilling regardless. Now, that’s all over, at least for a while. What can we expect now that negative oil prices have arrived in the Permian? Today, we’ll dissect the latest bizarre pricing event to rattle the Permian natural gas and oil markets.