Week Ending November 12

West Texas Intermediate traded 48c lower on the week to settle Friday at $80.79/Bbl. Dominating the news cycle was if and what action the Biden administration may take to try and relieve high gasoline prices. The White House has tossed around the idea of releasing crude from the Strategic Petroleum Reserve, but the most helpful thing about releasing crude from the SPR is it gives analysts something to write about…

• Short Term (six months)
  • Global oil market remains tight
  • OECD inventories are below the five-year average
  • COVID-19 is still impacting oil markets – Jet fuel
  • Shareholder and investor pressure on public oil companies in the U.S. is keeping a lid on production
  • OPEC+ is holding back about 4 MMBbl/d of oil production to support the market
  • Cold winter could boost oil demand from gas-to-oil switching (Europe, Asia)
  • Some OPEC+ members are unable to fill their quota
  • Economic slowdown risks
  • Government intervention
• Intermediate term (7-18 months)
  • The oil market is forecast to be oversupplied in 2022, according to OPEC
  • OPEC+ plans to bring back all of its held back production over the next 12 months
  • Iranian barrels could renter the market if allowed to return to the JCPOA agreement – 1.5-1.8 MMBbl/d
  • Analysts’ consensus is there will be oversupply in 2022
  • Covid-19 risks remain as many believe it will be endemic, but new treatments lessen the economic effect
• Long Term (18-36 months)
  • Global underinvestment in oil and gas exploration reduce how much supply will be available
  • Pace of demand growth may be slower

Natural gas was highly volatile on the week. The December contract saw almost $1 of travel from top to bottom. Weather model fluctuations are the dominant force in gas-price movement. The gas market is likely in store for continued volatility in the coming weeks and months. We have recently received more questions about the gas market in 2023 and have addressed some of these topics in the Long-term section below.  

• Short Term (one season)
  • Shareholder pressure on oil public companies to keep production growth low/flat has slowed associated gas growth
  • Similar pressure on gas-focused E&Ps
  • Export demand is robust with LNG flows
  • On a weather-adjusted basis the U.S. gas market continues to be undersupplied
  • A mild autumn is leading toward an end-of-season storage of 3.62 Tcf, a fairly neutral number
  • Trade activity will key on early-winter forecasts; Peak winter 1.8 Bcf/d heating demand per degree F
  • U.S. natural gas burn for electricity generation has been overperforming versus coal, and we think it continues
  • International gas scarcity has influenced Henry Hub, but the economic link is limited; Exports are already maximized
  • Fear-buying pushed winter higher well before winter arrived (July-Sep 2021). Extreme call option skew still exists, but not as pronounced as it was.
  • Production is apparently rising. Appalachia has a new, small pipe; Haynesville growing; Permian associated gas
• Intermediate term (seasons two to three)
  • Rig Counts have improved, but still only at 550 active rigs versus 800 pre-covid
  • Activity growth is most from private companies
  • Gas supply is expected to rise over the next 1-2 years, but only moderately; Some call from 3-4 Bcf/d growth next year based on old well economics and current prices
  • There is about 2 Bcf/d of new LNG export capacity expected over the next 12 months
  • U.S. to international market LNG arbitrage implies high utilization, but forward curves don’t reflect as high an arb into next summer and winter
  • Marcellus production constrained without MVP pipeline, due in July ‘22
  • A high level of call skew exists in the forward curve, implying traders are more worried about upside risks; call skew has extended into summer, showing a bid for consumer-side hedges
  • Forward buying interest in the gas curve
  • Expectations of higher completions costs in 2022; services costs, labor, steel
  • Coal production is low, so gas should be preferred in 2022, too
  • Ongoing additions to wind and solar add daily volatility and displace some gas
• Long Term (seasons four to five)
  • U.S. LNG export buildout will have a lull in 2023 and 2024 at the same time supply may increase
  • The mandate for oil and gas firms to concentrate on free cash flow will limit supply trajectory; when will investors change their minds?
  • Bifurcation of costs of capital and well economics; old economics say drill, but cash isn’t being plowed back
  • LNG projects are more attractive now, making 2024+ U.S. look less constrained
  • Renewable creep stands to impact gas utilization in the power stack
  • Pipeline capacity likely capped in Appalachia; Growth must come from Texas, Louisiana, then Rockies, Oklahoma
  • The U.S. as a global gas staging ground, but this may be a year-five+ phenomenon
  • Rising marginal cost to produce gas because of exhausting Tier 1, and higher cost of capital
  • Price of oil