U.S. Grows as an Energy Superpower

Dean Foreman
Posted December 20, 2018

API’s latest Monthly Statistical Report (MSR) and quarterly Industry Outlook presentation are out, and here are the top headlines as we conclude 2018:

The United States is the World’s Leading Energy Superpower

• We’re No. 1 in crude oil production – 11.6 million barrels per day (mb/d) (API MSR, November 2018)
• We’re No. 1 in natural gas production – 94.5 billion cubic feet per day (bcf/d) marketed production in 2018’s fourth quarter (U.S. Energy Information Administration, December 2018)
• We’re No. 1 in the production of natural gas liquids (NGLs) –  4.8 mb/d (API MSR, November 2018).

The numbers are remarkable. They illustrate the breadth and depth of the U.S. energy revolution and translate into economic growth and increased U.S. security in the world. In the past, U.S. production data sometimes included an asterisk – leading in some scenarios but not others. The figures above pretty much eliminate the “ifs,” “ands” or “buts” associated with any discussion of U.S. energy muscularity.  

Consider this: U.S. production of NGLs – liquid fuels produced with natural gas such as ethane, propane, butane and others – makes the U.S. natural gas industry the world’s No. 4 oil producer (behind the U.S., Russia and Saudi Arabia). Again, remarkable.

U.S. Petroleum Trade Fuels Economic Growth While Defying Global Trends

• Record crude oil exports (2.4 mb/d) and, consequently, the lowest petroleum net imports (2.2 mb/d) in more than 50 years;
• Record refinery throughput for the month of November (17.3 mb/d) and year-to-date (17.3 mb/d); and,
• The largest crude oil inventory accumulation for the month of November.

U.S. net petroleum imports at their lowest point in more than half a century, again, speaks to greater American security and our country having greater control over its future.

These trends flange with the Industry Outlook, which reinforces emerging trends of:

• Slowing economic growth and heightened market volatility; and,
• EIA expectations for continued oil and natural gas production growth colliding with constraints for infrastructure and market demand growth, which add uncertainty in terms of production and pricing.

To those who follow energy markets, these are tectonic moves on the chessboard of global energy players.  

And to consumers who care mainly about energy prices and their retirement savings through financial markets, these trends may tell us something about the pulse of global growth, investment, and energy policies that could be essential to ensure the U.S. energy revolution can sustain itself in 2019 and beyond.

Let’s dig into some of the details, starting with the economy.

Beginning six months ago, we correctly highlighted the tide turning for the global economy and oil markets with indicators of slower growth and elevated risks that belied strong demand through the middle of 2018.  Since then the signposts have become clearer that rising interest rates, trade and tariff disputes, near decade-high U.S. dollar appreciation, and financial market uncertainties have become pronounced and affected global crude oil markets. 

Our new Industry Outlook highlights how important emerging oil and natural gas market trends reinforce the need for free and fair international trade relations, support for essential pipeline and export infrastructure and a level playing field among fuels.

Downshift in the global economy

As GDP growth in Europe and China in particular came in below expectations for the third quarter, economies around the globe have begun to feel the effects of global trade frictions, deepening debt crises and Brexit. 

The International Monetary Fund has been busy with one emerging market after another – Argentina, Pakistan, Ghana, and San Marino and potentially South Africa – lined up for bailouts. Currencies in Brazil and Russia have been under tremendous pressure, down versus the U.S. dollar by 16 percent and 14 percent, respectively, this year through early December. 

Among the pillars of the emerging market economies – the BRICS countries (Brazil, Russia, India, China and South Africa) – only India remains in relatively good shape. Credit and liquidity are the lifeblood of economic growth, and The Bank of International Settlements (BIS) showed that international debt issuances to emerging markets declined over the past year and have not given indications of a rebound.  Consequently, financial markets have downshifted into a “risk off” posture that has lowered commodities prices across the board including oil.

U.S. oil supply an embarrassment of riches

Oil prices fell in November by the sixth most of any month since 1990, with the top three declines all occurring during the Financial Crisis in Q4 2008. Amid turmoil in global oil markets, we have the production levels mentioned above.

Considering U.S. refinery throughput and crude oil exports were at record levels in November, the accumulation of U.S. crude oil inventories was remarkable and underscored how the U.S. energy revolution has continued to be foundational to U.S. energy security and economic growth.

Near-term U.S. production growth should continue with drilling activity through Q4 2018 up from that in Q3 2018, but if low oil prices persist some pullback in drilling activity could be expected. 

However, EIA reports the backlog of drilled but uncompleted wells (DUCs) reached a record high above 8,500 wells in October.  Even if drilling activity eases the backlog of completions could take more than six months to work off at the recent pace of 1,300 completions per month, so the U.S. is poised to meet virtually all global oil demand growth in 2019, just as it has in 2018.

U.S. oil production has become increasingly cost competitive, with BTU analytics estimating Q4 2018 breakeven prices for the two fastest growing production basins, the Permian basin and Bakken formation, at $40 to $43 per barrel. 

Even with West Texas Intermediate (WTI) crude oil prices having fallen to $52 per barrel or 30 percent between Oct. 3 and Dec. 4, most Permian and Bakken production has been robust, pushing the limits of pipeline infrastructure constraints that have recently become prominent and contributed to a Brent-WTI crude oil price differential that averaged more than $8.60 per barrel in November. 

Recent reports by Bloomberg and RBN Energy do not foresee these infrastructure constraints being alleviated until the latter half of 2019, which suggests the use of relatively expensive rail and trucking to move crude oil could continue to suppress domestic oil prices relative to international ones, and with WTI prices of around $50 per barrel in mid-December this price difference can be important to the viability of U.S. production.

Natural gas looking past the winter

There’s an old joke about eyewitness weather, where a reporter glances out the window to determine what to say. U.S. natural gas markets have recently behaved much like this as a stint of cold weather drew into question whether inventories that have been their lowest levels since before 2010 will be adequate if cold winter weather continues. 

This had spurred an increase in natural gas prices to more than $4 per million Btu in November and early December even though at this time there generally are no physical shortages of gas across the U.S. Futures markets for natural gas reflect this fact and currently revert to less than $3 per million Btu by April 2019, so let’s stay focused on longer-term natural gas market fundamentals.

As with oil, the EIA STEO currently projects a U.S. natural gas surplus and relatively weak prices over the balance of 2019. BTU Analytics likewise estimates breakeven prices for the major gas production regions – the Marcellus, Utica and Haynesville –  that at $1.20 to $1.60 per million Btu have been well below recent prices at Henry Hub above $4.00 per million Btu. This positions the U.S. for solid natural gas production growth to continue, and based on the EIA’s outlook could present significant challenges to new secure domestic and international markets for this potential gas supply growth.

Domestically, natural gas demand grew in the industrial and power generation sectors in 2018, but the EIA projects virtually no demand growth for these sectors in 2019. The EIA does project U.S. exports of liquefied natural gas (LNG) to expand to 5.3 billion cubic feet per day (bcf/d) in 2019 from 3.0 bcf/d in 2018, but this growth of 2.3 bcf/d is uncertain given the global economic and trade uncertainties and, in any event, pales by comparison the production growth of 9.6 bcf/d in 2018. 

This means, when we look past short-term concerns for seasonal weather, the U.S. natural gas market is demand-limited, and the benefits to the U.S. economy from growth in production, infrastructure and exports could be undermined in 2019.