Alex Mills
By Alex Mills
Even though crude oil and natural gas prices are at 10-year lows, there was some positive news for oil and natural gas producers just before Christmas.
First, the U.S. House and Senate passed a $1.1 trillion appropriation bill and President Obama signed it on Dec. 19, which included a provision that repealed the ban of domestic crude oil exports.
On Dec. 23, crude oil traded at Cushing, Oklahoma sold at $36.14 per barrel compared to $36.11 for oil sold on the international Brent trading location in London. Typically, domestic oil sold at Cushing sells for $3 to $5 per barrel less than Brent.
Both Brent and WTI saw a boost on Dec. 22 after the American Petroleum Institute released data showing an unexpected drop in stockpiles. The API suggested inventories fell 3.6 million barrels in the week ended December 18th, compared with an expected 1.1-million-barrel increase.
Brent’s weakening as WTI strengthened slightly brought the two benchmarks into parity for the first time since January. With the U.S. export ban being lifted, the spread has collapsed. Some analysts predict that the spread will be small in the near future.
The good news for U.S. producers was quickly crushed when news from Iran indicated that 500,000 to 800,000 new barrels of oil will be on the market as soon as the sanctions are lifted, which should be in the first quarter of 2016.
News reports from crude oil analysts confirm that most of the decline in U.S. production has come from marginal stripper wells and other high-cost, low-margin production. The high volume wells have not diminished substantially, and production can be ramped up as soon as prices improve. Further declines in U.S. oil production looks doubtful.
While the supply situation looks to continue on course, demand for crude oil looks to be flat to modest gains in 2016.
According to the International Energy Agency (IEA), inventories of crude in developed countries stand at a record three billion barrels. Global inventories are at levels not seen in at least a decade.
And those inventories continue to grow at a pace in excess of one million barrels per day. Global oil production in October alone stood at 97 million barrels per day, according to the IEA.
One report claimed that onshore storage facilities are near maximum capacity, and there are more than 100 million barrels of oil floating at sea, which is double the level earlier this year.
Natural gas prices are at very low levels, too. Warm weather throughout most of the Midwest, South and Eastern U.S. has kept demand low, which sent NYMEX natural gas prices into free fall last week to 16 year lows.
While the market is clearly already pricing in a near-record bearish event for 2016, the situations could deteriorate even further with storage reaching as high as 3,846 billion cubic feet (Bcf) on Dec. 11, according to the Energy Information Administration.
The most optimistic forecast is 1,900 Bcf.
Natural gas prices traded on Dec. 22 for the Northeast U.S. averaged less than $1.00 per thousand cubic feet (Mcf) and around $1.65 in most trading locations in Texas. Prices were a little higher out west with PG&E Citygate and SoCal Citygate both reporting the highest price of $2.47.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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