The fourth quarter of 2018 witnessed a sharp decline in crude oil pricing, falling nearly 40% from October to close out the year. Since then, oil prices have since rebounded to the $50/bbl range. Meanwhile, natural gas prices have dipped to under $3/MMBtu after hitting highs of over $4/MMBtu in November and early December. While concerns around oil and gas price volatility and other external challenges (i.e., geopolitical events, etc.) remain at the forefront of market participants, below are just a few key indicators shaping the upstream oil and gas sector so far in 2019.
1) U.S. Shale Output Continues Climb
U.S. crude oil production from shale plays is estimated to climb to a new record of more than 12 MMbbl/d this year and rise to nearly 13 MMbbl/d in 2020, with most of the growth coming from the Permian region of Texas and New Mexico, according to the U.S. Energy Information Administration’s (EIA) Short-Term Energy Outlook (STEO). By this time, the nation will also start exporting more crude oil and fuel than it imports, the EIA noted. The U.S. became the world’s largest crude producer with production of nearly 11 MMbbl in 2018, breaking the country’s annual record set in 1970.
Meanwhile, U.S. dry natural gas production is also expected to hit all-time highs, averaging 90.2 Bcf/d this year, an 8% increase versus 2018, and reach 92.2 Bcf/d in 2020. Increases in the Appalachia and Permian regions are expected to drive the forecast growth, according to EIA.
2) Supply & Demand
In 2019, the U.S. is expected to continue leading growth in oil supply worldwide and will continue to do so through 2025. Total liquids are projected to rise from 17.5 MMbbl/d in 2018 to 22 MMbbl/d in 2025, according to EIA’s reference (base) case. Improving pipeline takeaway capacity, particularly in the Permian Basin, and the combination of horizontal drilling and hydraulic fracturing, continue to drive higher and more efficient production in the U.S. In addition, rising drilled but uncompleted wells (DUCs) will likely be drawn down as a lower cost production alternative, which will contribute to supply growth going forward. On the demand side, the EIA expects global consumption of petroleum and liquid fuels to average just over 1.5 MMbbl/d in both 2019 and 2020. The relatively stable consumption growth reflects small forecast declines in the rate of GDP growth from 2018, which EIA expects will be generally offset by lower oil prices in 2019 and 2020 compared with 2018, along with increases in petrochemical-related demand and International Maritime Organization (IMO)-related volume gain.
3) LNG Surge
Daily U.S. LNG production reached a record high of 5.28 Bcf during the week of Christmas, according to S&P Global Platts. Last year saw some large-scale additions to global LNG production capacity, such as Shell’s Prelude and Inpex’ Ichthys, both offshore Australia, and Novatek expanded its Yamal LNG facility. Looking ahead, U.S. LNG export capacity will grow significantly. The U.S. has only two facilities operating with less than 4 Bcf/d, but that’s about to change. The Gulf Coast alone has nearly 8 Bcf/d capacity under construction and another 6.8 Bcf/d has been approved. Over 26 Bcf/d has additionally been proposed.
4) Rising Oil & Gas Production = Depressed Prices
The good news is that production for both oil and gas is increasing and producers have adjusted to the current pricing environment. However, the bad news is that increased production will limit price increases. Therefore, forward pricing for both oil and natural gas is estimated to be relatively flat in 2019. The EIA forecasts Brent prices (the international crude benchmark) will average $61/bbl this year and $65/bbl in 2020. In 2018, Brent prices averaged $71/bbl. Additionally, EIA expects West Texas Intermediate (WTI) crude oil prices will average $8/bbl lower than Brent prices in the first quarter of 2019 before the discount gradually falls to $4/bbl in the fourth quarter of 2019 and throughout 2020.
Meanwhile, EIA forecasts that Henry Hub natural gas spot prices will average $2.89/MMBtu this year and $2.92/MMBtu in 2020, down from $3.15/MMBtu in 2018.
