Austin, Texas (October 7, 2020) — Enverus, the leading oil and gas SaaS and data analytics company, has released its latest FundamentalEdge report, A Hard Balance: The Persistent Oil Glut and the Coming US Gas Shortage, providing the company’s market outlook and view of where the oil, natural gas and NGL markets are headed over the next five years.
The report’s overview begins by highlighting how prompt WTI futures traded within a $36-$39/bbl range in early September but rebounded to just over $40/bbl as the October contract approached expiry. Underlying market concerns about weaker global demand that drove prices lower early in the month are being overruled, at least temporarily, by successive hurricane-related production disruptions in the U.S. offshore Gulf of Mexico. This rebound in market sentiment is likely to dissipate as the hurricane season comes to a close and gasoline demand sinks into a long winter’s nap.
Additional topics covered in this FundamentalEdge report include seasonal gasoline demand and OPEC+ working to counter underlying bearish concerns, as well as how a surge in global COVID-19 cases is raising the prospect of another spate of lockdowns in Europe.
Members of the media can download a preview of the full report or contact Jon Haubert to schedule an interview with one of Enverus’ expert analysts.
Key takeaways from the report:
- Crude oil prices recovered steadily over the summer as demand for transportation fuels (except for jet) rebounded from the lows of April-May. Unfortunately, the demand recovery has since lost momentum, and WTI is currently struggling to tread water at $40/bbl. The partial recovery in gasoline demand over the summer driving season in the United States was a critical support for the crude complex, but now demand for gasoline is settling into a long winter’s nap. As winter approaches, middle distillates will increasingly need to drive support for crude, and that appears to be a tall order given the amount of diesel/gasoil that accumulated in inventory over the summer as refiners sought to regrade their jet fuel woes away. As a result, the continued weakening of distillate cracks has ratcheted up pressure on refining margins and has elevated the risk of economic run cuts in the weeks ahead. Meanwhile, OPEC+ is struggling to maintain compliance and Libyan supplies are coming back to the market after being absent since January. With the Saudi energy minister now desperately threatening short sellers, we have taken a more bearish stance on oil prices at the turning of the new year ($35/bbl in 1Q21).
- With crude oil prices expected to remain depressed in 2021, associated gas is not expected to return next year. To offset the drop in associated gas, higher prices will be required to incentivize production gains from dry plays. Natural gas production growth is necessary to meet peak winter demand in the U.S. as well as the call for LNG exports. Economics for LNG have improved with stronger European prices in the forward market. This could put the natural gas market into an even shorter supply-demand balance scenario (more bullish) than currently anticipated. Enverus expects natural gas prices to average $3.49/MMBtu in 2021 and $3.00/MMBtu starting in 2022 as oil prices recover to $55-$60/bbl.
- Natural Gas Liquids production is expected to decline into mid-2021 as a result of lower crude oil prices. While Y-grade production fell with shut-ins and since has bounced back, some product demand has remained strong. C2 demand has been resilient throughout the pandemic, with petchems running at high rates. Additional petchem and export facilities will bring additional demand to the ethane market. Weather will play a key role in the coming months for C3, as crop drying and heating season will be the primary demand markets during winter. C4+ economics indicate downside price risk heading into the winter season, as gasoline blending at refineries is down due to reduced refining margins, causing run cuts, and diluent demand for heavy crude is down, as Canadian production remains depressed.
- The industry is watching E&Ps to determine sentiment and activity. Well costs are at historical lows, while DUC counts are at historical highs — both will allow for a greater capital efficiency and lower capex next year. Hedging activity is also limited, with operators reluctant to lock in the lows. Many will be tuned into 3Q20 earnings calls to gauge how the downturn has influenced the space.
Enverus is the leading energy SaaS company delivering highly-technical insights and predictive/prescriptive analytics that empower customers to make decisions that increase profit. Enverus’ innovative technologies drive production and investment strategies, enable best practices for energy and commodity trading and risk management, and reduce costs through automated processes across critical business functions. Enverus is a strategic partner to more than 6,000 customers in 50 countries. Enverus is a portfolio company of Genstar Capital. Learn more at Enverus.com.