Enverus, a leading global energy data analytics and SaaS technology company, has released its latest FundamentalEdge report. Entitled “A Delicate Balance,” the report focuses on oil and gas’ current winning streak and includes the company’s five-year market outlook, current view of the oil, natural gas and NGL markets, and the financials supporting them.
According to Jesse Mercer, senior director of Crude Market Analytics at Enverus, crude oil prices have had a good run over the past several months and the backwardated structure in futures markets is encouraging continued inventory destocking. “Improvements in demand for key motor fuels like gasoline and diesel have certainly played their part, but ultimately the key factor behind the continued tightening of physical markets has been production cuts enacted by OPEC+ members,” Mercer said. “OPEC+ cohesiveness though may be put to the test if the United States and Iran reach an agreement in ongoing negotiations about reconstituting the nuclear deal the U.S. withdrew from in 2018. If this happens, we could see up to 1.5 MMBbl/d of Iranian crude re-enter the market starting as early as this summer.”
“Natural gas is benefiting from higher crude prices, too, and, as a result, LNG exports continue to set record highs. But how long this growth continues depends on several factors, including the role natural gas will play in our energy future. It is certainly going to be key in any kind of energy transformation, but for how long will be telling. For now, operators are enjoying a winning streak.”
Key takeaways from the report:
- Crude oil prices have been on a winning streak since the fourth quarter of 2020 and continue to test resistance at higher levels. With demand for key motor fuels like gasoline and gasoil/diesel on the mend, the continued vigilance by OPEC+ members to manage supply has been instrumental to the global rebalancing and, therefore, higher oil prices. Backwardation in both WTI and Brent forward markets are indicative of physical market tightening, with negative carry trades leading traders to empty storage tanks. 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. Despite the desire of OPEC+ participants to unwind current production cuts, active market management is likely to be a feature of this market for the foreseeable future.
- Natural gas production growth has resumed in 2021 after a challenging 2020 with its weak demand and a low-price environment. Two key factors are driving this growth: LNG exports and higher crude oil prices. LNG exports continue to set record high levels, currently reaching 10.8 Bcf/d in April 2021.The forward curve for WTI shows oil prices in 2021 above $60; this is an increase of about $15/Bbl compared to the January report. Higher crude oil prices mean more associated natural gas from the Permian, DJ, and even Eagle Ford. Enverus expects gas prices to average greater than $3.00/MMBtu.
- Natural gas liquid production is expected to remain relatively flat in 2021 and grow in 2022+. Ethane has temporarily been relieved from market tightness as the February winter storm Uri decreased demand for the product at petrochemical facilities. However, as those facilities ramp back up, the market will once again be tight based on current recovery. Propane, similar to ethane, is in a tight-market situation. Days of supply in inventory is near the bottom of the five-year range and exports are near all-time highs. Normal butane will see demand and supply increases as refineries continue to increase operating rates and gasoline blending picks up. C5, like normal butane, will see an uptick in demand from gasoline blending, but also from increased Canadian production where natural gasoline is used as a diluent.
- Budgets for 2021 have been set and capex is flat year over year. We expect to see limited upward revisions to activity levels given the market’s recent favorable reactions to public operator capital discipline. This quarter, we are introducing more in-depth operator coverage through the benchmarking of 35+ operators using NAV model outputs from our Capital Markets team. We see relatively low reinvestment rates and capital discipline leading to slight production growth from large caps, limited growth from small-to-mid capital (smid-cap) operators, and high free cash flow yields across the coverage list. Lastly, buoyed oil prices leave many hedge programs out of the money. We suspect many operators used much of their remaining hedge capacity to lock in the highs in 1Q21
