Like everything else in the world, energy markets are undergoing totally unprecedented convulsions. It seems as if everything that was working before COVID-19 is now broken, and an entirely new rulebook has been thrust upon us. Of course, it is impossible to know how crude oil, natural gas and NGL markets will play out over the next few weeks, much less in the coming years. But if we make a few reasonable assumptions, extrapolate from what we know so far, and crunch through a bit of fundamental analysis, it is possible to imagine what energy markets will look like after the worst of the coronavirus pandemic is behind us. One thing is for sure: things will not be anything like they were before. Where energy markets may be headed next is what we will conjure up in today’s blog.
Posts from Rusty Braziel
Statewide shelter-in-place orders, worldwide business shutdowns, market meltdowns, medical calamities. Much of what is going on right now is unprecedented in the modern era, and there are no guideposts to help predict what happens next to the world as we knew it. But in the boom-bust energy sector, it is déjà vu all over again. We have seen steep drops in prices, drilling activity and production enough times to have some idea about how this is likely to play out. Granted, this time around it is particularly bad, but that doesn’t change the sequence of events that we are likely to experience over the coming months and years. Today, we’ll look back at what happens to Shale-Era basins after a price collapse, focusing on the inherent lag between a major reduction in activity level and the inevitable production response.
Throw out your old production forecasts. Delete your pricing model spreadsheets. Push out the dates on your infrastructure project timelines. Or kill the projects all together. We’ve got a black swan on our hands here, folks. Perhaps a flock of black swans. And while we may see something like normal again in a few months, there is little doubt that it will be an entirely new normal. How do we even think through the wrenching transformations that are working through energy markets? At RBN, we don’t have any more answers than anyone else, but we do have a structured approach to market analysis supported by a set of spreadsheet models that are the core of our School of Energy, scheduled for April 14-15. We think that’s exactly the kind of approach necessary to make sense out of this volatile and chaotic market. And although we have cancelled the in-person conference, we’ve made the decision to GO VIRTUAL! Today, we explain our decision to move forward with the virtual School of Energy and discuss the new material we are incorporating into the curriculum to address today’s market realities.
On Friday, global energy markets entered uncharted territory. Already facing declining demand due to the impact of COVID-19, markets then were dealt a body blow with the collapse of the OPEC-Plus alliance and the resulting prospect of a significant increase in supply. Saudi Arabia wanted to manage supply to balance against lower demand, but Russia was having none of it. Instead, reports from the OPEC-Plus meeting indicate that Vladimir Putin has declared war on U.S. shale. Then on Saturday, the plot thickened. Saudi Arabia made huge cuts in the price of its crude oil, presumably in a high-stakes move to bring Russia back to the negotiating table. Even though we are witnessing unprecedented market conditions, it’s not Armageddon. Crude oil will continue to be pumped, piped, shipped and refined. Most infrastructure projects under construction before the collapse in oil prices will be completed. The big question is, how will the market adapt? In today’s blog, we’ll begin an exploration of that question.
On Friday, CME/NYMEX WTI Cushing crude oil for April delivery closed at $44.76/bbl, down more than $16/bbl, or about 27%, since New Year’s Day. The declines in natural gas and NGL prices were not quite as severe, but only because those commodities were hit harder than crude during 2019. Even before COVID-19 landed on the market, energy prices were already under pressure from continued record production levels from U.S. shale, weakening demand, a mostly mild winter and a general investor pall over all things carbon. The threat of a global coronavirus pandemic was all it took to push things over the edge. So now what? Of course, nobody knows. But we can contemplate what this all could mean for energy markets, based on what we’ve seen in recent market statistics and price behavior. So that’s what we’ll do in today’s blog.
It’s almost Spring 2020 and energy markets are making another turn. Prices have been clobbered by a combination of low, weather-related demand and COVID-19. Tight capital markets have the E&P sector hunkered down and the pace of production growth is slowing. But at the same time, new pipelines out of the Permian and Bakken are under construction; some are already ramping up flows. Long-delayed LNG terminals and NGL-consuming petrochemical plants are coming online. Essentially all growth in crude and gas — plus most incremental NGL production — is being exported to global markets, and those markets are pushing back. All this has huge implications for commodity flows, infrastructure utilization and price relationships for oil, natural gas and NGLs. Which means that it’s time for RBN’s School of Energy, with all of our curriculum and models updated for the realities of today’s energy markets. Today — in a blatant advertorial — we’ll examine our upcoming School of Energy and explain why this time around we are concentrating even more than usual on NGLs.
There is no such thing as a typical NGL barrel. For example, the composition of y-grade production out of the Marcellus is significantly different from y-grade out of most of the Permian. And it is not just gas processing engineers who care. The make-up of an NGL barrel is inextricably linked to the value of that barrel. The reason is pretty simple: there’s a big difference in the value of each of the five NGL products. These days, natural gasoline is worth nearly eight times as much per gallon as ethane. Normal butane is worth 1.6X as much as propane. Consequently, the more natural gasoline and normal butane in your barrel versus the amounts of ethane and propane, the more the barrel is worth. So it’s important to anyone trying to follow the value added by gas processing and related infrastructure to understand where these numbers come from and how much the composition of a barrel can vary from basin to basin, or for that matter, from well to well. In Part 2 of our series on gas processing, we turn our attention to the variability in the mix of NGL production and its implication for processing uplift.
Wouldn’t it be nice if everything you needed to keep up with the market was right there on your phone or tablet? And it would be even handier if the data and stories organized themselves just for you, around topics you care about the most. Such a technology would address a formidable challenge we all face: keeping up with the torrent of market information coming at us from trading platforms, online services, trade publications, you name it. It would pull everything you needed into a single database and then organize information on the fly around whatever topic matters most to you at a point in time. And it would be able to reorganize that information on demand as market data ebbs and flows. Over the past few months, we’ve designed an app that tackles this challenge head-on. Today we are introducing the concept of ClusterX, explaining how it works, and giving you the opportunity to help us roll out our new technology to the RBN blogosphere. Warning: this is a blatant advertorial for our new energy market analytics app.
OK, we admit it. Our title may be a bit of an overstatement in early 2020, but it was absolutely true back in 2012, when the frac spread was $13/MMBtu. These days, the frac spread — the differential between the price of natural gas and the weighted average price of a typical barrel of NGLs on a dollars-per-Btu basis — is only $2.48/MMBtu as of yesterday. But with Henry Hub natural gas prices in the doghouse — they closed on February 11 at $1.79/MMBtu — getting $4.27/MMBtu for the NGLs extracted from that gas, or an uplift of 2.4x, is still a pretty darned good deal. And that’s Henry Hub. Natural gas prices are lower in all of the producing basins, and are likely headed back below zero in the Permian this summer. So even with NGL prices averaging 30% lower than last year, the value of NGLs relative to gas can be a big contributor to a producer’s bottom line — assuming, of course, that the producer has the contractual right to keep that uplift. Today, we begin a blog series to examine the value created by extracting NGLs from wellhead gas, including processing costs, transportation, fractionation, ethane rejection, margins, netbacks and the myriad of factors that make NGL markets tick. We will start with the frac spread — what it tells us in its simplest form, how we can improve the calculations so it can tell us more, and, just as important, the economic factors that the frac spread excludes.
For the first time since late September 2013, the ratio of crude oil to natural gas (CME/NYMEX) futures on Friday hit 30X. That means the price of crude oil in $/bbl was 30 times the price of natural gas in $/MMBtu. Such a wide disparity in the value of the liquid hydrocarbon versus the gaseous hydrocarbon has huge implications for where producers will be drilling, the proportion of associated and wet gas that will be produced, the outlook for NGL production, and a host of other energy market developments. The ratio has been moving higher for the past couple of years, and recently has been boosted by the combined impact of increased tension in the Middle East (higher oil prices) and a warm winter so far in many of the largest gas-burning population centers in the U.S (lower gas prices). But it’s pretty likely that the trend will be with us for the long term. So today, we’ll begin a series that looks at the implications of this price relationship.
Negative Permian gas prices. Wall Street sours on all things energy. E&Ps and midstreamers forced by capital markets to tighten their belts. Infrastructure coming online just as production growth is slowing. Oil, gas and NGLs totally dependent on export markets to balance. The list goes on. Just as producers and midstreamers came to terms with a new normal for oil and gas prices, this new round of challenges hit the market in 2019. And it is going to get a lot more complicated as we enter the new decade. There is just no way to predict what is going to happen next, right? Nah. All we need to do is stick our collective RBN necks out one more time, peer into our crystal ball, and see what 2020 has in store for us.
December 2019 U.S. crude oil production soared 1.1 MMb/d above this time last year to 12.8 MMb/d. It’s a similar story for natural gas, with Lower-48 production climbing to 95 Bcf/d, up 6 Bcf/d over the year. That’s a little off the breakneck growth rate of 2018, but still quite healthy, even in the context of Shale Era increases. And it all happened in the face of continued infrastructure constraints, crude prices that fell from the mid-$60s/bbl in April to average $55/bbl from May through October, and gas prices that in several months were crushed to the lowest level in 20 years. It’s all too much supply to be absorbed by the U.S. domestic market. And that means more pipes to get the supply to the Gulf Coast and more export facilities to get the volumes on the water. What has all this meant for the market’s response to these developments? Well, at RBN we have a way to track that. We scrupulously monitor the website “hit rate” of the RBN blogs fired off to about 28,000 people each day and, at the end of each year, we look back to see which topics generated the most interest from you, our readers. That hit rate reveals a lot about major market trends. So, once again, we look into the rearview mirror to check out the top blogs of the year based on the number of rbnenergy.com website hits.
As exports of crude oil, natural gas and NGLs have surged, U.S. markets for these energy commodities have undergone radical transformations. Exports now dominate the supply/demand equilibrium. These markets simply would not clear at today’s production levels, much less at the volumes coming on over the next few years, if not for access to global markets. Making sense of these energy market fundamentals is what RBN’s School of Energy is all about. Did you miss our conference a few weeks back? Not to worry! You’ve got a second chance! All the material from the conference — including 20 hours of video, slide decks and Excel models — are now online. Fair warning: Today’s blog is an unabashed advertorial for the latest RBN School of Energy + International Online.
U.S. energy markets are coming to the end of their latest infrastructure cycle just as the reality of tight capital markets is sinking in. Permian crude oil and natural gas takeaway constraints are being relieved by new pipeline capacity. Long-delayed LNG terminals and NGL-consuming petrochemical plants are coming online. Essentially all growth in crude, gas and NGL production volumes is being exported to global markets that — so far, at least — have been absorbing the incremental supply. But there is a chill in the air. Besides the recent bump-up in crude prices tied to last weekend’s attack on Saudi oil facilities, commodity prices have remained stubbornly low. Easy access to capital is a thing of the past. No longer can private equity count on the build-it-and-flip asset investment model. Yup, it’s another inflection point in the Shale Revolution that we’ll start exploring today. All this has huge implications for energy flows, infrastructure utilization and price relationships across all of the energy commodities.
As exports of crude oil, natural gas and NGLs have surged, U.S. markets for these energy commodities have undergone radical transformations. Exports now dominate the supply/demand equilibrium. These markets simply would not clear at today’s production levels, much less at the volumes coming on over the next few years, if not for access to global markets. It is more important than ever to understand how the markets for crude, gas and NGLs are tied together, and how the interdependencies among the commodities will impact the future of energy supply, demand, exports and, ultimately, prices. Making sense of these energy market fundamentals is what RBN’s School of Energy is about. Warning! Today’s blog is a blatant commercial for our upcoming Houston conference. But we hope you will read on, because this time around, our curriculum includes all the topics we have always covered at School of Energy, PLUS five all-new sessions dedicated to export markets.