U.S. crude oil prices languish below $50/bbl, but the oil-directed rig count is up by 90, an increase of almost 30% over the past 12 weeks. Natural gas production is down less than 1% from the all-time high hit back in February even though the price of natural gas remains below $3/MMbtu. The price spread between U.S. propane and international markets is far below a level that should justify exports, but LPG exports to overseas markets continue at astronomical levels –– approaching 700 Mb/d, most of which is propane. What’s wrong with this picture? Why does it seem that relationships between energy production, demand and prices have broken down, or at least have undergone some fundamental shift? That is what our upcoming School of Energy Fall 2016 is all about. Warning: Today’s blog includes a commercial for our upcoming Houston conference, scheduled for November 2 and 3 at The Houstonian Hotel.
At first glance, a number of energy market relationships may seem to have shifted, but the reality is that we are just looking at the market from a different perspective than ever before – the recovery from a Shale Revolution crude oil price crash. Two years ago U.S. hydrocarbon markets entered Shale 2.0. (Sorry about using such a tired old metaphor, but it works.) Figure 1 lays out this concept, showing the price cycles we’ve seen over the past decade with natural gas, natural gas liquids (NGLs) and crude prices all shown in MMBtus so that they are comparable. Back in 2007-09 before the Shale Revolution started to impact markets (labeled Pre-shale), gas, NGLs and crude tended to move in tandem. Moving in almost perfect correlation, all three of these markets blew out in the commodity run-up of 2008 and all crashed with the Great Recession.
But by then shale had come to natural gas, and pricing for gas, NGLs and crude diverged (the Shale Gas era). Natural gas oversupply kept prices low while crude and NGLs recovered along with the global economy. That motivated producers to move to wet gas – containing lots of NGLs, because NGL prices were still strong. U.S. hydrocarbon markets entered the Wet Gas era.