Oil and gas market rebound underpinned by market discipline at home and abroad
Energize Weekly, May 26, 2021
Oil and natural gas have seen a rebound in 2021 but those gains are delicately balanced on market discipline in both global and domestic markets, according to an assessment by industry analyst Enverus.
“Everyone needs to be disciplined, it’s a matter of survival,” said Jesse Mercer, Enverus senior director for crude market analytics.
One the international side, the rebound in oil prices – the May 21 $66.73 a barrel spot prices of Brent crude was nearly double the price last October – was the result of the OPEC+ production quotas, with which the more than 15 oil producing countries in the agreement have more or less complied.
Saudi Arabia, however, has been the backstop making sure production targets are met when other countries exceed their quotas. In March, Saudi Arabia cut production by 53 percent more than their target of 9.1 million barrels a day (MMBbl/d).
“The Saudis have been the glue holding that OPEC+ agreement in place the last six months,” Mercer said.
In the second half of 2021, the market demand will be bolstered by a resurgent economy as the COVID-19 pandemic subsides. Demand and prices for transportation fuels are already improving and are projected to make up 77 percent of 2022 global liquids demand growth – about 2.28 MMBbl/d.
The market rebound, however, could be hobbled by geopolitics.
“Trouble though is brewing on the horizon as the Biden Administration pursues negotiations with Iran which could ultimately lead to the return of roughly 1.5 MMBbl/d of Iranian supplies on the world market by the end of 2022,” Eneverus said in its market outlook.
“That would be challenging,” Mercer said. “That is enough to put the market into oversupply.”
Enverus projects that the global market could slip into a 3.3 MMBbl/d oversupply by the first quarter of 2022.
“If the OPEC+ isn’t able to accommodate that oil coming on to the market we could be looking at some downside price risk,” Mercer said.
For the U.S. market and operators – particularly those operating in shale or so-called tight formations – discipline, has been key, after plunging oil prices in early 2020, the result of a price war between the Saudis and the Russians, and the pandemic-depressed economy led to a flood of red ink and 46 bankruptcies, the most in five years.
Companies cut budgets, capital expenditures and production to conserve cash and even with the rise in oil prices, operators so far have remained measured.
“Tight oil producers in the United States have managed to sufficiently constrain output despite the strong $60+ WTI [West Texas Intermediate] flat price environment,” Enverus said.
Evenus said it anticipates stable budgets and single-digit production growth through the year, while free cash flow will hit 10 percent on average in 2022.
The bankruptcies, corporate restructurings and paying down debt have also cut the heavy debt load small and mid-sized shale drillers took on to boost production, with the leverage of this group dropping to 1.6 times from 2.5 times, Enverus said.
“When we had prices go negative last year, that really woke a lot of people up to the situation,” Mercer said. “It was negative for a particular futures contract, but we had oil prices in the low teens.”
Mercer said that while publicly traded companies are showing some discipline, it is the private shale companies that have been less so and are drilling more.
Enverus is forecasting U.S. crude and condensate production for 2021 at 11.6 MMBlb/d, compared to 13 MMBlb/d in 2019. “Producer restraint, however, is unlikely to remain permanent,” the analytic group said. It is projecting output to rise to 12.7 MMBlb/d by 2025.
Growth in natural gas production also resumed after a year with weak demand and low prices. The rise is being driven by liquified natural gas (LNG) exports and higher crude oil prices, Enverus said.
LNG exports continue to set record high levels, currently reaching 10.8 billion cubic feet a day in April 2021, Enveurs said, while natural gas prices are set to average more than $3 per million BTUs.
The spot price at the Henry Hub fell to as low as $1.67 a million BTUs in 2020.
With WTI prices expected to remain above $60 a barrel in 2021, a $15 increase over Enverus’s January assessment, there will also be more production of associated gas from wells in shale plays such as the Denver-Julesburg Basin, the Permian Basin and the Eagle Ford Shale.
“Natural gas production growth has returned and is expected to continue over the next five years.” Enverus said. “Higher oil prices of course mean lower gas prices can still bring incremental gas production to the market.”
