10. In the regional gas-on-gas wars, the winner is Henry Hub. Increasing natural gas production from Marcellus/Utica, the Permian and all other major basins will compete head-to-head for the only significant growth market in the US: Gulf Coast region. Constrained pipeline capacity will put downward pressure on pricing in all areas outside the Gulf Coast.
9. In the regional crude market wars, the loser is Cushing. Permian crude oil wants to move to the Texas Gulf Coast, not to Cushing. Cushing will still be the CME/NYMEX delivery point for WTI crude but there is no doubt that Cushing is becoming less relevant to the US crude oil network as more barrels target the Gulf’s refinery capacity (50% of the US total) and all crude exports.
8. In the NGL market, the winner is ethane. Ethane demand from new ethane-only crackers is cranking up and it’s simply going to take higher prices to end ethane rejection in markets that have the capacity to get ethane barrels to the Gulf Coast.
7. Mariner East 2 will turn Marcellus/Utica NGL markets inside out. From 2014 to 2017, production of C3+ from Marcellus/Utica ramped up 150Mb/d, far more incremental supply than could be absorbed in the region. About two-thirds of the surplus reduced the need for seasonal inflows and forced huge outflows by rail. Those rail movements will come to a screeching halt when ME2 comes online in 2018. If most propane is dedicated to exports via ME2 and the rail terminals are mothballed, diversion for local needs will be problematic.
6. Permian gas could be facing unprecedented adverse market conditions. Permian natural gas takeaway capacity is facing constraints. There are projects on the way but they are a year or two out. Permian economics are driven primarily by crude and NGL revenue and many Permian wells would be drilled even if gas price were zero. Unlike other situations where huge basis differentials result in poor drilling economics and a pullback in drilling, in the Permian we could see a situation where dirt-cheap gas prices hardly slow the pace of drilling.
5. Permian gas could light up the West Texas night sky. One possibility open to Permian producers to alleviate their surplus gas problem is flaring. We’ve seen this in 2012, when one-third of Bakken gas was being flared. Texas Railroad Commission has a highly structured process called Statewide Rule 32 Exception that is designed to handle flaring from wells that don’t have access to local gas gathering system – but regional takeaway constraints are a different animal. We’ll be paying close attention to this one.
4. Neat condensate is getting neater. In June 2014, Commerce Department approved rules that allowed exports of “processed condensate” – otherwise known as “neat” condensate. Suddenly, all crude exports were permitted, removing the special status for neat condensate and Eagle Ford production was dropping like a rock due to the crash in crude prices. Fast forward to 2017 – there is not enough condensate to go around and they trade at a premium. Next shoe to drop is the Permian where production of condensate is accelerating, particularly in Culberson County and nearby. Increasingly it makes sense to segregate these condensates so they can get to Gulf Coast splitters and export markets as neat products to capture those premium prices.
3. The Haynesville natural gas rebound will continue, but… Haynesville is back, up about 1.5bcf/d in 2017 or about 25% above December 2016. New players and new technologies have put the Haynesville on track for a full recovery, back to 10bcf/d over the next 5 years. But Haynesville recovery only continues if gas prices hang in there at something that resembles the current forward curve (strip of about $3.00/mmbtu or higher).
2. Crude prices will continue to trade in the zone, as long as the OPEC deal holds up. Looks like the Saudi’s have finally figured out what they have to do to keep crude prices in the goldilocks zone: high enough to avoid financial meltdown but low enough to keep US shale producers from running rampant. Market today is about as balanced as it gets but it is only balanced because OPEC and NOPEC are making it so. Reversing course and increasing production are unlikely but it could happen and that will keep the crude oil market on edge in 2018.
1. Crude oil exports will remain robust, but growth will slow. US still refines far more crude oil than it produces, so every barrel that is exported must either be replaced by an imported barrel or result in a net decrease to crude inventories. It makes sense for the US to export some crude to replace light barrels that comes from shale basins with imports of medium-grade crude from global sources. But that only works up to a point. Once the refinery quality-mix is balanced with the available crude slate, then incremental exports should become uneconomic. Only caveat is that some producers seem to like talking their export book, so we may see some export growth even if economics don’t pass a spreadsheet test.
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