Wake Up Call - Navigating Crude Oil, Natural Gas, and NGLs Through the Energy Transition

For all who thought an energy transition was going to be orderly, economic, or rational, the chaos of 2021 energy markets is a wake-up call. It’s not that the shift from fossil fuels to renewables is causing most of the market turmoil, but it is certainly magnifying the effects of a host of energy market glitches that, together with the mechanics of the transition, are wreaking havoc on the global economy. Which underscores the challenge of this generation: We must live, work, and produce hydrocarbons the way the world functions today, while at the same time preparing for — and investing in — a much-lower-carbon future. As we’ve heard this week from Glasgow, it’s a future that a lot of folks believe means net-zero greenhouse gas emissions and no hydrocarbons. That challenge is the underlying theme for RBN’s Fall 2021 School of Energy, to be held next week, November 9-10. Not only have we restructured our agenda to include a half day covering the impact of hydrogen, CO2 sequestration, and renewable diesel, we’ve reworked and updated our core hydrocarbons market curriculum to examine how crude oil, natural gas, and NGL markets will evolve to accommodate what lies ahead. In today’s encore RBN blog edition — a blatant advertorial — we’ll consider these issues and highlight how our upcoming School of Energy integrates existing market dynamics with prospects for the energy transition.

Let’s look at some symptoms of the transitional trauma. As shown in the graph on the left in Figure 1, over the past year, WTI Cushing crude oil prices are up 70%, from less than $50/bbl to the $80/bbl vicinity. The price of U.S. crude is now higher than it has been since the 2014-15 crash. It is an even bigger deal in the Permian, the fastest-growing basin in the U.S. for the past seven years. Even when the Permian was going gangbusters, production was constrained due to inadequate pipeline takeaway capacity, reducing the price that many Permian producers could realize on their volumes. In 2018, the crude price in Midland was $7.24/bbl below Cushing. Today those constraints are gone, and Midland prices have averaged $0.25/bbl above Cushing over the past month.

Have higher prices mattered? Hardly at all. The graph on the right in Figure 1 shows that U.S. crude oil production has barely budged since the COVID-19-induced crash of April 2020 pushed output down from about 13 MMb/d to about 11.5 MMb/d in the most recent EIA stats. While the Permian has seen some growth, most of the other basins are flat to down. Whether you call it producer discipline, capital constraints, or E&P reluctance to invest during uncertain times, the result is the same: A vastly muted response to higher prices, which itself contributes to still higher prices. The old oil patch adage that “High prices are the cure for high prices” seems to have been repealed. What does that mean for production forecasting assumptions and models? That’s on our agenda for School of Energy.

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