A combination of new-pipeline development, lower capex by producers, production shut-ins, and changing expectations for future production has significantly altered crude oil and natural gas market fundamentals in the all-important Permian Basin. Just over a year ago, Permian production was rising steadily and oil and gas pipelines out of West Texas were running at or near full capacity. Since then, nearly 2.2 MMb/d of incremental crude takeaway capacity has come online, and production dropped by about 700 Mb/d before rebounding somewhat in recent weeks. As for gas, some takeaway constraints remain, but they are limited to when pipelines are offline for maintenance, and will be alleviated when new pipelines start operating in 2021. Today, we discuss the recent downs and ups in Permian production, takeaway capacity additions, and the resulting impacts on markets and market participants.
As 2019 was drawing to a close nine months ago, Permian producers knew that big changes would be coming in 2020. But they had no idea what they were in for. They expected steady increases in crude oil and natural gas production, driven by what was then $62/bbl West Texas Intermediate (WTI) and by rising demand for gas from a slew of new liquefaction/LNG export facilities along the Gulf Coast. Producers also were confident that a trio of new crude pipelines from West Texas to the Corpus Christi area — Cactus II, EPIC Crude, and Gray Oak — would ease takeaway constraints out of the Permian, and that while it would take longer, gas-takeaway constraints would be alleviated too as new Permian-to-Gulf Coast pipelines started up in 2020 and 2021.
However, what they didn’t anticipate — how could they? — was a global pandemic that would substantially slow economic activity in much of the industrialized world, especially the U.S.; annihilate demand for jet fuel, motor gasoline, and (to a lesser degree) diesel; and spur the U.S. refinery sector to reduce their utilization rates to less than 70%. Nor could they predict that, just as stay-at-home orders were being implemented, Saudi Arabia would initiate an oil price war with Russia (though they later pulled back), or that WTI prices would actually go negative (if only for one day). Then there’s the gas side of things. Who would have guessed last New Year’s Eve that U.S. LNG export volumes, which had been rising steadily since 2016, would fall by more than half in the first few months of 2020, causing a sharp drop in U.S. gas demand in the process? Don’t forget that Permian producers, with their vast volumes of associated gas, have long been banking on the LNG export market to absorb a big share of their incremental gas output.
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