Doesn’t it feel as if everybody’s getting the jitters, and the poltergeists have certainly struck the oil market, as prices hit 5-month lows, released from their circa $40/ Bbl trap. There’s been yet more pessimistic data on COVID-19, as Western Europe heads into stricter lockdowns, led by France, Germany and now the U.K., while cases in the U.S. remain at record levels, and daily cases worldwide keep reaching new highs. Then add in the uncertainty over the U.S. Presidential election, although with only a few days to go it still appears to be a Biden victory. I am right in thinking that, aren’t I? Oh yes, I also heard the odd murmurings that a few OPEC members were reluctant to carry-on with the previously agreed cuts of nearly 8 million Bbls/d, with a few member states increasingly concerned about their fragile national finances.
But as of yet the renewed bearish undertones have yet to permeate their way through to the LPG space. The optimism of the last few weeks may not have evaporated as yet, but the crystal ball is looking a little chipped going forward into next year and beyond. It again raises the question as to where LPG is heading, not least that big big question of how LPG exports out of the U.S. are going to fare?
The EIA reported this week that energy investment, primarily in upstream oil and gas, was on course for a thumping 35% tumble for 2020. In addition, one of the sector’s biggest oil companies ExxonMobil cautioned the market last week that it was about to take a $30 billion write-down, mainly on U.S. shale properties. The Baker Hughes rig count, although up 9 rigs on last week, it’s still less than 300 in total, a drop of 526 rigs from this time last year. But so far U.S. NGL production has remained robust. I had expected propane production, sitting at record levels of nearly 2.5 MM Bbls/d at the beginning of the year to have dropped below 1.8 MM Bbls/d under the economic severity unfolding from the coronavirus outbreak, but it didn’t, with only a 1.9 MM Bbls/d low. The only true “V” shaped recovery that the markets have seen is probably U.S. propane production, hovering around the 2.2 to 2.4 MM Bbls/d in recent weeks.
A lot of people have been asking why, not least Rusty Braziel during his recent School of Energy virtual gathering. What’s been the reason for NGL production keeping its head in front of the pack? Will it continue? And where does it leave export volumes going into 2020 and beyond? The simple stats show that U.S. crude oil production has slumped from around 13 MM Bbls/d in March this year to not much more than 11 MM Bbls/d today, a drop of nearly 20%. In addition natural gas production peaked at just under 96 Bcf/ d at the start of the year, but currently sits around 85 Bcf/ d, down just a little more than 10%.
As we get our NGLs from associated and non-associated gas you would have thought NGLs would be looking about the same, but folks in the oil and gas patches started changing a few of the ways they were doing things. We’ve talked before about the ability to complete drilled but uncompleted wells (DUCs), but there was also a move to extract oil with a greater gas content, together with higher BTUs, and therefore more NGLs to extract. There’s also been less flaring, as room to gather the gas and send it to less utilized gas plants opened up, while ethane rejection is down by nearly a quarter, as US petrochemical cracker demand and increased ethane exports reduced the rejection levels. Production has also benefitted from new fractionation capacity coming on-stream, and being able to play catch-up with all the stored Y-grade sat below the ground in Mont Belvieu. But how can this paradox last much longer? Surely the writing must be on the wall somewhere? And even though LPG export growth is not merely the result of production advances, there is of course a very strong correlation.
The worry for me is that we can’t just look at crude oil prices and see it as the great redeemer. That $45 or $50/ Bbl WTI prices will simply result in higher flows of crude oil and therefore NGL production. The logic has always suggested it will, but with oil prices hovering around that $40/ Bbl level for what seems an absolute age, all we’ve seen is less being produced, less being invested, and therefore less likelihood of production growth.
We’ve been talking for well over a year now about the difficulties shale companies face in getting new funding, for the need to consolidate smaller companies, probably into the hands of the oil majors, but now even these companies have considerable issues allocating resources for buying oil and gas assets. Also, let’s not forget the dramatic shift in focus by the oil majors themselves, both in terms of PR and funding, clearly aiming at higher sustainable energy targets. Increased oil prices are not going to result in a sudden rush back of drilling rigs into the oil patches. Even with $45/ Bbl crude oil projections, RBN Energy are only predicting production growth in the Permian, with all other areas likely to decline.
U.S. NGL production forecasts look bleak to say the least, whatever methods of tinkering producers can apply. Forecasters tend to be creatures of habit, projecting that lower domestic NGL numbers can only pass through to a corresponding drop in U.S. LPG exports, made worse in their minds by increased domestic usage resulting from new propane dehydrogenation (PDH) plants coming on stream. Exports are predicted to reduce from current record levels by around 200 M Bbls/d in 2021 and struggling to even maintain those levels through 2023. In international terms that’s an annual reduction of over 6 million Mt of LPG being exported from the U.S., slamming annual numbers back below 40 million Mt, maybe dropping the U.S. below the Middle East.
But as you know I just don’t go along with this scenario. I think the incentive to squeeze every last drop of LPG out of the oil and gas system will continue, and in addition the recent inventory excesses will have to drop to a more reasonable level, even though every U.S. retailer fears not having a storage buffer for cold weather systems. This might wipe off 50 MM Bbls of LPG inventory over the next two years. That’s the equivalent of an extra couple of million Mt a year that can go for export. I’ve also lumped in more butane as refineries use less as a result of sloppy demand and further changes to the driving sector. But the big force for me is going to be demand in Asia, pulling exports away from the domestic U.S. users, whether that’s the flexible petrochemical crackers or the slowly declining retail, industrial and commercial propane users. The global economic recovery looks heavily skewed towards China for me, and they need imports, from the U.S. or from the Middle East is only a matter of price.
So, as the export terminals in the U.S. Gulf get ready for another storm this weekend, this time Zeta, and re-sale fees maintain a certain degree of strength close to 10 cents/ gallon, you can see that even with the current high levels of U.S. LPG production, the ARB is still reflecting Asia’s stronger demand pull, tweaking up terminal fees, and therefore encouraging the likes of Enterprise to directly, or subliminally, compete in the domestic market for barrels to subsequently export. Unless U.S. domestic LPG buyers step up to the mark, I’m not so sure we will see U.S. exports decline in line with what appears to be a pretty forlorn upstream oil and gas scenario! On that note, let’s wait to see what Tuesday brings. It’s surely going to dominate markets for quite a while.