For the past three years, the price for U.S. WTI crude oil at Cushing has remained close to $50/bbl while natural gas at the Henry Hub has gravitated in a range around $3.00/MMbtu. It has been one of the most stable periods of energy prices in decades. But below the surface of stability at the major hubs, prices at the regional level have been wildly volatile, driving dramatic swings in geographic basis. Alternating cycles of basis blowouts followed by basis collapses have become standard fare for U.S. oil, gas and NGLs as producers ramp up production, local prices get hammered due to capacity constraints, midstream companies respond by (over) building infrastructure, and regional price differentials implode due to overcapacity. With more production growth and infrastructure on the way, these basis cycles will keep on coming. In today’s blog, we’ll consider a few of the market sectors particularly susceptible to basis volatility, and provide a subliminal advertorial for our upcoming School of Energy, where we explore both the underlying causes and the outlook for future basis cycles.
The cycles of basis blowouts and subsequent collapse are nothing new; in fact, the phenomenon has been an integral part of energy markets since the earliest days of hydrocarbon production. It has been an increasingly significant factor, however, since the onset of the Shale Revolution. For those of us who have been in the business of energy market fundamentals for a while, the poster child for basis cycles was the original rendition of the Rockies Express pipeline – REX. What happened with REX shippers has been repeated time and time again over the past 10 years, so it’s instructive to start our blog with that story that we first recounted in detail in Get Back to Where You Once Belonged.
REX – The Classic Model for Basis Blowout
Here’s the short version. Way back in 2007, Rockies natural gas production was growing rapidly. Volumes were up from about 7 Bcf/d in early 2005 to almost 9 Bcf/d by 2007. The Rockies could not use anywhere near that much gas, and so gas had to be moved out of the region to the Midcontinent and to the West. Unfortunately, there was not enough pipeline capacity to move surplus Rockies gas, resulting in a huge glut of gas that could not be moved, with dramatic consequences for prices.
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