Top 10 Energy Prognostications for 2019

Energy

#10: The natural gas demand curve is experiencing a fundamental shift

  • 2018 L48 production grew by an astonishing 10bcf/d from January to December, an increase of about 13%
  • We are burning more gas than the degree-day-based models would predict, even if you adjust for the shutdown of coal plants and the impact of new gas-fired plants coming online
  • The more renewables in the power dispatch stack, the more the system relies on gas-fired plants that can start up quickly when the sun does not shine and the wind does not blow
  • This trend will probably continue to cause gas demand to surprise to the upside. And that will make gas prices that much more sensitive to shifts in the weather. Translation: more volatility

#9: Fractionation capacity constraints will continue to wreak havoc with NGL markets

  • Saw some wacky price behavior in 2018, including an ethane run-up from 25c/gal mid-year to 62c/gal in September and in the same timeframe experienced historically wide Conway-vs.-Mont Belvieu fall season differentials for all the NGLs
  • Mont Belvieu and the rest of TX essentially ran out of capacity just as new ethane-only crackers were coming online
  • Since then, the market has corrected. But not before prompting announcements for seven new TX Gulf Coast/Mont Belvieu fractionation projects with a total of about 1.1MMb/d of capacity
  • These and several others that had already been slated to start up won’t come on soon enough to keep NGL markets from experiencing more chaos in 2019

#8: Eagle Ford crude oil production will surge – unless crude prices collapse

  • Eagle Ford looks to have a lot going for it: good rock; highly productive wells; higher local prices than the capacity-constrained Permian; several boxed-out Permian producers moving south to avoid those pipeline capacity constraints; new pipelines that will get production to Corpus Christi; and new Corpus dock-capacity projects that will support increased exports

#7: The wild ride for ethane prices isn’t over

  • 3 new world-scale crackers came on between late 2017 and YE2018, adding about 250 Mb/d of new ethane demand; as we enter 2019, another 3 are in start-up mode and will add another 140 Mb/d of demand
  • If the petchems follow through with 3 more 2019 projects that reached FID years ago, there will be still another 175 Mb/d of ethane demand online before the year is out
  • Although production forecast says that there will be more than enough ethane production to meet this demand, this kind of increase is unlikely to go smoothly

#6: New LNG exports will boost Gulf Coast natural gas prices

  • Liquefaction projects are slated to come online at Cameron, Elba Island, Freeport, Corpus as well as another train at Sabine Pass
  • LNG export capacity will be up another 3.7 bcf/d, with 60% of that total from Corpus and Freeport on the TX Gulf Coast
  • Much of that capacity is likely to come online before KMI’s Gulf Coast Express out of the Permian gets to the Gulf Coast
  • In the interim, expect Gulf Coast gas prices to increase relative to Henry Hub and especially relative to the Permian

#5: Permian crude oil basis: Short-term pain, long-term gain

  • In 2018, Midland vs. Cushing crashed to a $18/bbl discount in September, then narrowing back to about a $5/bbl discount to end the year. 4Q correction was in part due to a slowing of production growth tied to low local prices, but the big factor narrowing the differential was PAA’s Sunrise/Basin Expansion, which added more than 200Mb/d of outbound capacity at just the right time
  • Sometime in early 2019, expect to see differentials widen anew as the marginal barrel is again forced into truck and rail outlets
  • Before YE2019, new crude oil pipeline capacity will be coming online. That’s the beginning of the long-term gain, at least for producers

#4: Mariner East 2 will turn Marcellus/Utica NGL markets inside out – someday

  • Delayed start-up last year forced a lot of supply to continue moving out of the basin via high-cost rail, resulting in significant margin losses to some Marcellus/Utica players
  • As ME2 cranks up, many more barrels will move to export markets out of the Marcus Hook terminal, radically reducing volumes moving by rail transportation and tightening local markets – especially for propane
  • Due to permitting delays, ET/Sunoco was forced to use a piece of “jumper” pipe to get ME2 going, and we hear it will reduce capacity well below the 275Mb/d nameplate – to somewhere between 70 and 150
  • Even though ME2 will bring big changes to Marcellus/Utica NGL markets, those changes will likely trickle in over time, rather than hitting all at once as we projected last year

#3: Midstreamers are getting better at the capacity/overbuild game

  • Wide differential justifies the building of a new pipeline; pipeline gets built; then the differential that justified the pipe goes away; situation is particularly irritating for the committed shippers that sign up for take-or-pay deals that secure most of the pipeline’s investment return for the midstreamer
  • Over the next couple of years, 7 pipeline projects that have been announced would add another 5 MMb/d of capacity out of the basin
  • We see a lot of production coming on over the next 5 years but not that much. And only about 1.5MMb/d over the next 2 years. Midstreamers and their shippers see this too, and are taking steps to consolidate projects so that they don’t get stuck with a massive overbuild
  • If consolidation happens, that would be the rare development that tends to stabilize market differentials rather than create more volatility

#2: More volatility is coming to US energy markets

  • US has generally been in growth mode ever since the early days of the Shale Revolution. But 2018 was different. Following the crude price collapse in 2014-15, producers figured out how to do more with less. When prices headed back in to the $70s/bbl range in mid-2018, producers could do a whole lot more
  • About the only thing we can be sure of is that there is more production growth coming at the market. The higher the price, the more the production. And more production creates the potential for even greater price volatility

#1: US crude, gas and NGL exports will dominate market pricing

  • By far the most revolutionary development in US, crude oil, NGL and gas markets is the dominant role of exports. These markets simply would not clear at today’s production rates, much less the production increases coming over the next few years, if not for access to global markets
  • Nearly 40% of all NGLs from gas processing are already being exported
  • In 2019, US could be exporting 20-25% of domestically produced crude oil
  • Even natural gas could see 15% of production move by pipeline to Mexico and overseas via LNG
  • Consider what it means if US propane prices are more sensitive to the weather in Europe and Asia than to the weather in Minnesota and Wisconsin. It is happening and it’s a development that changes everything about the way the markets can be expected to behave in 2019 and beyond

The Top 10 RBN Energy Prognostications for 2019 – Year of The Pig: When Pigs Fly!, January 1, 2019

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