Shale Wars: Efficiencies Strike Back
Supply awaits demand in latest episode of ever-shifting oil and gas market saga
Media Contact: Jon Haubert | 303.396.5996
Austin, TX (July 12, 2017) – In the latest installment of its market outlook series, the Fundamental Edge, Drillinginfo has released Efficiencies Strike Back, an updated 5-year outlook for crude oil, natural gas and NGLs.
“Supply awaits demand,” noted Maria Sanchez, manager of energy analytics at Drillinginfo and lead author of this quarter’s market outlook report. “US producers can now bring a lot more production at lower commodity prices as they become more efficient, lowering their drilling and completion costs as Initial Production (IP) rates increase with new wells drilled,” continued Sanchez. “Storage stocks also remain high putting a lid on significant price gains in the short term. Demand is growing, but the growth rate is outplaced by production,” she said.
Since early 2014, crude oil & petroleum products have been largely oversupplied. The oversupply peaked in 2Q2015 at just over 2 MMBbl/d, whereas the oversupply situation was largely reversed in 2Q & 3Q2016 due to supply outages such as Canadian wildfires, Nigerian infrastructure attacks, and Libyan unrest, among others. In 4Q2016, the oversupply was 560 MBbl/d, and was widely thought to be reversed in 1Q2017 due to OPEC and non-OPEC quotas becoming active in January, but latest IEA data suggests that the quarter remained oversupplied by an average of 170 MBbl/d. This oversupply was despite the higher than expected compliance with the OPEC cuts. The oversupply in 1Q2017 was largely due to increasing production from the US and nonquota carrying OPEC members (Nigeria & Libya) and lower than expected seasonal demand. According to the latest IEA data, given May 2017 supply estimates and expected 2Q2017 demand, the current implied deficit is 0.67 MMBbl/d.
Drillinginfo is forecasting 4.3 Bcf/d of dry gas production growth by the end of 2017, but volumes will be heavily back-loaded to Q4. 1.5 Bcf/d of growth is expected in the Northeast alone. Other areas leading growth are the Haynesville, Permian and Anadarko. Specifically, production in the Permian Basin continues to hit record highs every month and rigs continue to be added.
Higher Prices Impact NGLs
Despite depressed NGL prices, production is poised to grow dramatically as a result of oil and gasdirected drilling. Most of the growth is attributed to higher oil and gas prices, not due to significant demand growth. The Permian is the main contributor to the growth seen in NGL volumes due to economics which has incentivized producers to increase drilling. Drillinginfo has revised its NGL production forecast from 4,000 Mb/d to 4,500 Mb/d in 2021 as a result. Additional infrastructure, including capacity to produce petrochemicals and new export terminals, will help facilitate this growth. Prices are currently low as supply far outpaces demand. While gains have been made over the last year, the last few months have seen significant dips in C3+ due to crude oil prices falling. NGL prices are expected to move higher as crude and natural gas prices recover and demand increases. Ethane prices will rise with increased demand from crackers, along with a ramp-up in exports.
Drillinginfo is now estimating the long-term price equilibrium at $60/Bbl WTI for crude oil and $2.85/MMBtu for natural gas. These prices are expected to materialize starting in 2020 and support production growth in all commodities at a rate to meet projected demand growth.
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