Lower crude oil prices whack oil-directed drilling, slashing crude production, which cuts associated gas output, tightening the gas supply-demand balance, and boosting gas prices enough to spur more gas-directed drilling — it’s a classic case of commodity market schadenfreude, where one product benefits at the expense of another. That’s the way it was supposed to work, according to various trading strategies touted a few weeks back. But here we sit, with crude oil prices still around $40/bbl and gas prices languishing at a paltry $1.66/MMBtu. Was there something wrong with the schadenfreude thesis, or do we have to look deeper to understand how prices will behave in this convoluted COVID era? In today’s blog, we’ll explore this question and what it may mean for natural gas prices in the coming months.
On January 1, 2020 the International Maritime Organization (IMO) implemented new fuel standards for oil-powered vessels, except those equipped with exhaust scrubbers to remove pollutants. In the absence of a scrubber, the IMO 2020 rule stipulates that ships' bunkers contain less than 0.5% sulfur. Using a scrubber allows the vessel to burn cheaper high-sulfur fuel. Last March, a shipowner’s estimated $2.5 million scrubber investment for a 2-MMbbl Very Large Crude Carrier (VLCC) would take just over three years to recover, based on average fuel prices during the first quarter of 2019. This year, barely a month after the new regulation came into force, the payback period has shortened dramatically, to less than a year, though the coronavirus’s effect on shipping demand and fuel prices, among other factors, could again put payout timing at risk. Today, we look at changing price spreads between high-sulfur and low-sulfur bunker and the scrubber payback economics that suggest a rosier outlook for vessel owners who invested in scrubber installations, at least for now.
If it’s not one thing, it’s another in the Permian natural gas market. Just as it appeared that prices in the West Texas basin were finally turning a corner and strengthening with the full start-up of Kinder Morgan’s Gulf Coast Express Pipeline (GCX) late last month, various issues have again conspired to send daily Permian cash prices back down to near zero yet again. And it’s not just the daily spot markets that have come under pressure; forward prices were also severely discounted a few days ago when Kinder Morgan announced that the in-service date of its next long-haul pipeline from the region — the Permian Highway Pipeline project — would be delayed from late 2020 to early 2021. Keeping track of the roller-coaster ride of Permian gas prices and the drivers behind the highs and lows continues to keep heads spinning. Today, we explain the latest wild moves in the Permian natural gas market.
Some shipowners plan to comply with the IMO 2020 deadlines for limiting sulfur in ship emissions by installing scrubber devices to clean the exhaust generated by burning less expensive high-sulfur bunker fuel. For many, this may work out to be more economical, at least in the interim, than using more costly IMO 2020-compliant fuel with sulfur content of no more than 0.5% or converting the vessel to run on an altogether different fuel such as liquefied natural gas. However, narrowing “sulfur spreads” this year have put that compliance strategy at risk by tripling the time it would take for shipowners to recoup their scrubber investments. Today, we continue an analysis of the changing economics of scrubber installation in the run-up to IMO 2020.
Last year, the impending implementation of International Maritime Organization’s rule mandating the use of lower-sulfur marine fuels starting January 1, 2020, widened the price spread between rule-compliant 0.5%-sulfur bunker and the 3.5%-sulfur marine fuel that has been a shipping industry mainstay. Traders’ thinking was that demand for high-sulfur bunker would evaporate in the run-up to IMO 2020, as the new rule is known. But since early January, the spread between low- and high-sulfur fuel at the Gulf Coast has narrowed from nearly $11/bbl to less than $2/bbl. The culprit is a shortage of heavy-sour crude caused by a number of factors. Today, we begin a two-part series on low-sulfur vs. high-sulfur fuel and crude values as IMO 2020 approaches.
During the summer of 2018, crude oil inventories at the trading hub in Cushing, OK, dropped to extreme lows. With estimated tank bottoms around 14.6 MMbbl, Cushing stockpiles hit 21.8 MMbbl for the week of August 3. Traders’ alarm bells were ringing, and upstream and downstream observers were wondering if low storage levels were going to cause significant operational issues. But just when it seemed tanks were nearing catastrophic lows, inventories reversed course and started to climb. Since August, crude stocks have increased by 13.6 MMbbl, or nearly 60%, and there is now talk of potentially too much crude en route to Cushing, maxing out capacity there. There are many contributing factors to this most recent inventory swing, with increased domestic production and the tail end of refinery turnaround season being two of the bigger fundamental drivers. But the main catalyst has been the shift from a backwardated forward curve to a contango forward curve in the WTI futures market. Today, we continue our Cushing series with a snapshot of recent contango markets and the impact those prices have had on stockpiles at the central Oklahoma hub.
U.S. crude oil production is back above where it was this time last year—at 9.1 MMb/d, 700 Mb/d over the low point last summer. Nearly 400 Mb/d of that surge has been since end-November when the OPEC deal was announced. So, in less than four months, U.S. producers have already taken one-third of the 1.2 MMb/d market share OPEC gave up. No doubt about it: The U.S. E&P sector is back. But not because prices are above $60 or $70/bbl. Instead, this recovery is being driven by rising productivity in the oil patch. And that makes it a whole different kind of animal than we’ve seen before, with implications for upstream, midstream, downstream and just about anything that touches energy markets. That’s the theme for our upcoming School of Energy—Spring 2017—“Back in the Saddle Again—Market Implications of the 2017 U.S. Oil and Gas Recovery” that we summarize in today’s blog.
On Friday (January 22, 2016) West Texas Intermediate (WTI) crude prices on the CME/NYMEX futures exchange closed up $2.66/Bbl – the second day of a recovery from their 28% plunge during the first 20 days of 2016. The jury is still out on whether the recovery will be sustained. There was a similar (though less pronounced) price decline a year ago in January 2015 that did not last very long at the time. But in comparison the price destruction during this month’s collapse was unusually severe - not just because we saw prices under $30/Bbl for the first time since 2003. Today we explain why the extent of the price destruction along the forward curve this time suggests that last week’s recovery may be short lived.
Following the news that regulations restricting the export of U.S. crude had been lifted, West Texas Intermediate (WTI) crude rallied to a slight premium over its international counterpart Brent for 6 days at the end of December 2015 – apparently leveling the playing field between the two rival light sweet grades. Is this the green light for a surge in U.S. crude exports? Not hardly. In fact, it is the other way around. Prices for WTI need to be well below Brent for exports to make economic sense and – according to the futures market – that is not happening anytime soon. Today we conclude our analysis of the Brent/WTI price relationship with a look forward to 2016.
Last year at this time (May 2014) the natural gas market was concerned with how depleted US natural gas storage might be by the start of the 2014-15 gas winter season. A short year later, the concern now is how full storage could get before next winter. CME/NYMEX Henry Hub natural gas futures prices for June delivery closed at 2.915/MMBtu yesterday – presumably reflecting a decidedly bearish 2015 supply/demand balance with forecasts predicting summer-ending inventory at upwards of 4.1 Tcf, which would be the highest on record. Today we provide an update on gas fundamentals.
The U.S. Midwest region is slated to get an infusion of cheaper Northeast natural gas supply later this year as the first of five new westbound pipeline expansions is expected to begin service in November. Already a couple of projects are moving gas to the Midwest from the Northeast. The Northeast-to-Midwest capacity will have a huge impact on the Midwest supply stack and consequently on prices. The Chicago Citygates forward curve shows prices flipping from premiums to discounts later this year. Today’s blog continues our look at how new pipeline capacity will re-shuffle the Midwest’s supply stack and change regional pricing.
The Dominion South Point strip price for the balance of 2015 (March-December) has been settling consistently under $1.90/MMBtu, while Transco Zone 6 in New York is averaging around $2.80/MMBtu in this week’s forwards market. Meanwhile, Northeast and US gas production remain near record levels. The breakeven price environment and looming oversupply leaves producers and the industry vulnerable to the downside. Where and when will prices bottom out? What, if anything, would trigger a rebound? Today Part 4 of our Forward Curve Series, focuses on fundamental factors driving Northeast forward curves over the next few years.
The NYMEX gas futures curve for 2015 was sitting right at $3.00/MMBtu yesterday (January 27, 2015) as colder weather has halted it’s recent slide. This still puts outright prices in the Northeast gas forward curve in dangerous territory for producers – very close to breakeven levels – through 2015 and not much higher even beyond this year. With NGL prices no longer supporting drilling activity for many producers in the region, the gas forwards market is becoming a bigger factor in signaling producers’ drilling prospects. Today in Part 3 of our Forward Curve Series, we continue our look at Northeast forward curves, with a focus on the Dominion South Point price hub, its historical shape and the fundamentals behind where it stands now.
We saw a slight recovery in crude prices Friday (December 19, 2014) with CME NYMEX West Texas Intermediate (WTI) futures up $2.41/Bbl from Thursday’s close. At the same time CME NYMEX Henry Hub natural gas futures were down $0.18 to $3.464/MMbtu. That meant the crude-to-gas price ratio between these two commodities was up 1.5X to 16.3X from it’s recent low under 15X on Thursday. However futures markets indicate that market expectations for the crude-to-gas ratio are for it to remain at a low level between 15X (i.e. WTI in $/Bbl is 15X Henry gas in $/MMbtu) and 17X for most of the next decade. If that turns out to be true there are serious implications for shale drilling, gas processing and LNG export prospects in the U.S. Today we look at what may happen and why.
Six months ago, the natural gas forward price for 2021 averaged $5.15/MMBtu. Back then a producer could hedge forward production at that price. Today 2021 is only $4.63/MMBtu, a decline of $0.52/MMBtu even though we are now in the middle of the winter. Today the forward market doesn’t get above $5.00/MMBtu until 2026, certainly a disappointment for many a producer that didn’t hedge last summer. What does the market know about the future that is different from what was known back in June? How do these forward curves work in the first place? In this new blog series on North American natural gas forward curves we will provide background on the mechanics of forward curves, examine the forward curve in each of the major regions in the North American natural gas market, and do a deep dive into natural gas historical trends, major drivers and market expectations as related to forward markets.