Low Prices

After enduring 2015-16 it is about time for some good news, right?  And that’s just what 2017 is shaping up to be—a relatively good news year for energy markets.  But don’t go crazy with this.  The key word in that sentence is “relatively’” —which means better than 2015-16, but if you are looking for that other “R” word (“recovery”) you won’t see it here.  Crude prices will be up some, but nothing like the first few years of this decade.  Natural gas and NGL prices will be stronger too.  But both may have to wait still another year before seeing a real upswing in 2018.   Nevertheless, 2017 is looking good for most of the energy market.  Not for everyone, mind you.  Many will struggle because their assets are in the wrong places, they are at the wrong end of the food chain, or they were simply unprepared for this new market reality.  How will you know the difference between the winners and losers?    Well of course, by looking deeply into the RBN crystal ball to see what 2017—Year of the Rooster—has in store for us.  Cock-a-doodle-do!

A long-standing tradition at RBN is our annual Top 10 RBN Energy Prognostications blog, where we lay out the most important developments we see for the year ahead.  Unlike so many forecasters, we also look back to see how we did with our forecasts the previous year.  That’s right!  We actually check our work.  Usually we can get that all into a single blog.  But a lot will be coming at us in 2017, so this time around we are splitting our Prognostications into two pieces.  Tomorrow’s blog will look into the RBN crystal ball one more time to see what 2017 has in store for energy markets.  But today we look back.  Back to what we posted on January 3, 2016.  Recall back in those days that crude production had not started to decline materially, West Texas Intermediate (WTI; the U.S. light-crude benchmark) was at $37/bbl, natural gas was $2.33/MMbtu in the middle of winter, Congress had just OK’ed crude exports, and weak exploration and production companies (E&Ps) were dropping like flies. Now let’s look at RBN’s Prognostications for 2016.

From the depths of despair in the first quarter when WTI crude collapsed to $26.21/bbl on February 11 and Henry Hub gas crashed to $1.64/MMbtu on March 3, we are back, sort of.   Growth in the rig count has been nothing short of spectacular, up 249 or 62% from the low point in late May. Crude oil, natural gas and NGL prices have all more than doubled since the lows of Q1.  Yes, 2016 has been quite a roller coaster ride for energy markets.  Here in the RBN blogosphere, we’ve documented this saga every step of the way. Now at the end of the year, as we’ve done for the past five years, it is time to look back.  Back over the past 12 months––to see which blogs have generated the most interest from you, our readers.  We track the hit rate for each of our daily blogs, and the number of hits tells you a lot about what is going on in energy markets. So once again we look into the rearview mirror at the top blogs of 2016 based on numbers of website hits in “The 2016 Hydrocarbon Top 10 RBN Blogs”.

The U.S. natural gas market is carrying about an 850-Bcf surplus in storage versus last year and the 5-year average.  But it looks like the surplus will finally start to contract in earnest over the next few weeks. So the big question is -- will it be fast enough to prevent crippling supply congestion by this fall? With Canadian storage inventories also high and U.S. gas production still averaging slightly higher than last year, it seems record demand will be needed to bring storage into balance. Today we look at the prospects for demand this summer to trump last year’s record demand.

With the first month of storage injection season now behind us, the weekly storage report from Energy Information Administration (EIA) shows U.S. natural gas stocks at about 850 Bcf higher than last year. While the surplus vs. 2015 has contracted from over 1,000 Bcf at the start of injection season April 1, it has a long way to go before the gas market is out of the woods, and prices are reflecting that. The CME/NYMEX Henry Hub contract for June delivery settled Wednesday at $2.141/MMBtu, down 68 (24%) from last year, and the balance-of-summer strip is priced at an average $2.408/MMBtu as of yesterday’s settles, 48 cents (17%) lower than a year ago. Given the sheer size of the overhang at this point, the pace of the surplus contraction will be at least as important to price direction as the fact that it is contracting.  Today we look at the various supply and demand factors that could either help or hinder the market to whittle down the storage surplus this summer.

The U.S. natural gas market ended the winter withdrawal season with inventories carrying a record high overhang and an enormous surplus versus previous years. Since then, the historic surplus has begun to contract, and the CME/NYMEX Henry Hub futures contract has responded, rallying 11.2 cents since April 1st to settle at $2.068/MMBtu Thursday. Now, well into the third week of injection season, the big questions are whether the recent bullishness can be sustained and what it will take to relieve the surplus in storage. In today’s blog, we assess how the existing surplus will impact summer storage activity and prices.

U.S natural gas storage inventories ended the winter heating season at a record high for this time of year of 2,480 Bcf as of April 1, 2016. Yesterday (Thursday April 14) the Energy Information Administration (EIA) reported that U.S. natural gas storage fell a notch as of April 8 to 2,477 Bcf or 956 Bcf (63%) higher than the corresponding week last year. CME/NYMEX Henry Hub natural gas futures prices for May delivery closed at $1.970/MMBtu yesterday, 56 cents lower than last year at this time. Moreover the current 12-month strip is averaging $2.48, 32 cents lower than last year at this time. In today’s blog, we look at how inventories got here and implications for the summer market.

In the five weeks since February 11, the price of WTI crude oil on the CME/NYMEX spiked 50%, up from $26/bbl to $40/bbl (see black dashed circle in Figure #1).  For hedge funds that took long positions in February, it was an awesome trade.  And for beleaguered producers, it was certainly a bit of good news.  But there are no celebrations in the streets of Houston and Oklahoma City.  The fact that $40/bbl should be considered “good news” is sobering: Eighteen months ago, that price level would have been seen as a catastrophe for the producing community.  In fact, it still is. In today’s blog we examine the factors that help push prices above $40/bbl and what it will take to really get US production growing again.

The monthly Energy Information Administration (EIA) Drilling Productivity Report (DPR) provides a leading indication of expected crude and natural gas production from seven leading shale basins across the U.S. The latest DPR released earlier this week (March 7, 2016) included a massive 2.5 Bcf/d upward revision to the shale gas production forecast for March. The upward revisions fly in the face of expectations of production declines at recent 17-year low prices. But they also validate daily pipeline flow data showing actual production climbing to a new daily record in February 2016 and continuing to stay robust. Today we break down the latest DPR data, what the revisions mean and consider implications for the market.

RBN estimates that midstream companies have built out about 950 Mb/d of crude-by-rail (CBR) loading terminal capacity in Western Canada. Data from the Energy Information Administration (EIA) shows actual CBR shipments from Canada to the U.S. topped out at 195 Mb/d in January 2015 and have fallen by 40% since then. Hard-pressed Canadian producers have been squeezed by lower prices and high transport costs with only limited relief as new pipelines came online. Today we review the fate of Canadian CBR transport capacity.