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US continues to set new records in the energy space, will the trend last in 2019?

  • Crude, natural gas price and production trend in the US
  • Movement in oil and gas rig counts in the last few years
  • Changes in the drilling sector and the impact on production

 

Crude oil and natural gas prices across the major commodity markets and especially in the US were highly mercurial in the last few quarters. While crude prices took a major hit in the second half of 2018, on the other hand, the natural gas prices as tracked for the Henry hub delivery registered a strong increase backed by a higher than normal winter demand amid extreme cold weather conditions in major parts of the country. WTI Crude ended the year down by ~25%, around the $45 per barrel level while natural gas was up by over ~11% to close the year near $3.3 per MMBTU level.

Notwithstanding the movement in prices, the US crude oil and natural gas production continue to be buoyed by technological advancements, with a large share of the output contributed by the shale producing areas in the country. The demand side dynamics stayed different for both the commodities with oil demand largely remaining stable in the past. However, a consistent increase in production has aided the US to reduce its oil import requirements; wherein it has also started exporting oil along with refined products and it may become a net exporter by 2020. The natural gas demand continues to be volatile, based on its use in different sectors like power generation, industry, commercial and residential space. The highest volatility in demand comes from the residential segment as it is dependent on weather conditions either related to their heating requirements in winters or cooling needs in summers. A heightened output of gas has already made the US a net exporter of the same.

Looking at other variables which directly drives production, the rig data has displayed a healthy increase for oil and gas rigs in the past two years. The rig activity improved substantially in 2017 with growth in the total and individual rig count standing at around 40% in all the categories and translating into 747 (oil), 182 (gas) and 929 (total) at the end of the year. A very healthy increase in rig count during 2017 was also aided by pent-up demand after a huge fall in the same during 2015 and the 1st half of 2016 when energy prices for both the commodities followed a bearish cycle. The deployment of rigs extended at a steady pace in 2018, with a rise of 18.5% for crude, 8.8% for gas and 16.6% in totality to 885, 198 and 1083, respectively. While tracking the price and rig data for medium to long-term, both the data points showed a healthy correlation with rigs standing out at moderate laggard as compared to oil and gas prices. Rightly so, as producers adjust to the ongoing projects, the future requirements and exploration plans based on the current and anticipated movement in the commodity prices. There was a largely stable movement in the natural gas prices in the US during the past two years and a modest increase in oil at least up to the first half of 2018 that drove producers to maintain and demand a greater number of oil and gas rigs, though the situation is expected to change after the oil fell sharply in the latter half of 2018.

If we track the rig movement further internally in the US during 2018, there was hardly any change in the crude oil rig count in the second half of the year (on net addition/deletion basis) though natural gas rigs did register a moderate rise during the period. For crude oil, there were periods of increase in the rig count on a weekly basis before it started to slid in the last quarter and even recorded a fall by 21 rigs in a week in December, this was its highest weekly drop since early 2016. Furthermore, with rig counts usually taking time to adjust to the movement in prices as is also stated above, there may be a continuing drop in some oil rigs though any significant change in the rig count is not expected in the medium term.

On a broader perspective, oil and gas producers in the US have become more stable in protecting and managing their operations after facing one of the worst crises in the energy space during the 2014-16 period. Companies have mainly worked upon two aspects; better management of internal operations along with look-out of technological solutions to reduce cost on exploration and production, while separately working with rig operators to increase the output per well, similarly cutting down the time and cost to drill new wells. The data from Baker Hughes and the US EIA (Energy Information Agency) shows the number of wells drilled per rig has increased over the last few years and continue to improve almost every quarter across regions. In the last five years, wells drilled per rig stepped up from 1.47 in 2014 to 1.95 in 2018 (on an average basis), while last quarter’s reading for 2018 stood above two. This implies that the drilling time (days per well drilled) has reduced from over 20 days (2014) to under 15 days as per the latest data.

The benefits of better operations’ management both internally and from rig operators are having a very positive impact on the production side for the natural gas and the crude oil in the country. As production for both the commodities grew at a very smart rate in 2018 with crude oil production growing at 16.9% on a yearly basis to 10.9 MBPD, while dry natural gas production also scaled up by 11.4% to 83.3 BCFPD. According to the EIA, the production is anticipated to set new records in 2019. The forecast from the latest STEO report by EIA shows a likely increase in crude oil production to 12.1 MBPD, while dry natural gas output seems to rise ~90 BCFPD (2019).

On the pricing side, we may see moderately subdued price movement for oil in 2019 as production stays higher, while global inventory levels also depict an increasing trend. But despite the OPEC’s recent call for a moderate cut in output for a more balanced market, it is possible that we may see a marginal surplus for crude oil in a few months/quarters if not for a full year (2019). Further, with economic cues also turning out to be increasingly worrisome for some of the developed and developing countries around the world, the market may be entering into a scenario where broader bearish or subdued sentiment might rule the oil and gas market with periods of clubbed volatility. Our expectation is excluding any risk out of a fall in output due to geopolitical issues or a change in the US policy regarding sanctions on Venezuela and Iran among others.

Hence, taking into account the above aspects, while actual US crude oil and natural gas output for 2019 may see a marginal downward revision in case there is a sharp and consistent drop in the prices for both the commodities, still this does not exclude the fact that rig utilisation and efficiency has persistently enhanced in the US in the last few years. The production for both the gas and crude oil is setting new records every year and the trend is expected to continue this year as well.

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