Data: Industry Poised to Enable Economic Recovery

Dean Foreman
Posted June 18, 2020

As the U.S. and world confront the unprecedented combination of a public health crisis, significant economic downturn and tumultuous domestic and global oil markets, we have seen oil demand, prices, and consequently drilling and production fall by historic amounts.

API’s latest Monthly Statistical Report (MSR) for May and Industry Outlook for Q2 2020 offer important perspective on the most timely monthly U.S. data and expectations for energy markets.

Overall, we see market forces at work, with a re-balancing of supply and demand to historic proportions despite great uncertainties. The underlying fundamentals appear to be constructive and should position the U.S. natural gas and oil industry to participate in an economic recovery. And if the third-party consensus is correct the next year or so could bring positives for U.S. and global energy.

But first let’s highlight the large shifts – positive and negative – that marked U.S. petroleum markets in May:

Increases   

• U.S. petroleum demand, led by motor gasoline, rebounded by 2.0 million barrels per day (mb/d) – the largest increase since December 1975.
• Increased refinery throughput and capacity utilization helped support record naphtha and gasoil demand for the month of May.
• Total petroleum inventories (crude oil and refined products, excluding the Strategic Petroleum Reserve) rose but remained within the five-year range.

Decreases

• Jet fuel deliveries (down 72.3% year over year) were the only major refined product to fall for the month.
• Total U.S. petroleum supply (crude oil, natural gas liquids and other liquids) decreased by 0.4 mb/d for the month and 2.0 mb/d since March.
• U.S. petroleum exports fell by 1.1 mb/d for the month, returning the U.S to being a petroleum net importer.

When we put it all together, these points tell us that U.S. oil supply, and to a lesser extent natural gas, has been re-adjusting to the low demand and prices so far in 2020. By petroleum product, gasoline accounted for 80% of the 2.0 mb/d rebound in May, while diesel fuel/distillates improved from April and naphtha/gasoil actually picked up relative to last year. 

But we also see the displacement of international market shares in production and deterioration of the U.S. trade balance, reverting to being a petroleum net importer after achieving net exporter status in the third quarter last year, which was a hard-earned benefit from the U.S. energy revolution.

When we monitor market fundamentals and scan forward, the most fundamental driver is the connectivity between local and global markets – and their inextricable linkage to economic activity. 

Global economic growth has historically been volatile and cyclical, averaging 3.0% per year from 1970 to 2019. As of June 2020, the third-party consensus based on Bloomberg and the International Monetary Fund is that global GDP will contract by 4.0% this year on a market exchange rate basis but rebound by 4.4% in 2021. 

While these estimates remain uncertain, $9 trillion of global stimulus efforts have been infused so far to counter the unprecedented combination of events mentioned above. And it’s reasonable to believe that $9 trillion of stimulus should have a positive impact sooner than later.

As economic growth goes, historically so has energy demand. Every 1% rise in global GDP was associated with 0.6% more energy consumption on average between 2010 and 2019 – on average and also consistently between 2015 and 2019.

By API estimates, this relationship had run slightly weaker for oil (0.5%) but stronger for natural gas (0.9%) in recent years, which fundamentally is why we remain optimistic that energy demand will rebound along with the economy. 

 Let’s turn next to global oil markets.

The U.S. Energy Information Administration (EIA) currently projects the global oil supply/demand balance will re-balance beginning in the third quarter of this year and support oil prices slowly climbing toward $50 per barrel over the next year.

Global natural gas markets have recently hit historic low prices as well.

Never before has the world seen global landed natural gas prices consistently below $3 per million Btu. While relatively low U.S. natural gas prices last year spurred record amounts of commercial activity that boosted liquefied natural gas (LNG) projects, the current business environment poses a litmus test.

Specifically, low prices stand to stimulate greater consumer demand globally, but they also make for a relatively risky environment for making large capital investments. 

In context, U.S. natural gas markets have fared similarly to oil on the demand side, with demand down by 19.2% between March and June, per EIA’s Short-term Energy Outlook. However, U.S. natural gas supply decreased by only 5.2%, maintaining working gas inventories that stayed within the five-year historical range in Q2 2020.

Consequently, U.S. natural gas markets were relatively better balanced than oil markets, and benchmark prices as Henry Hub of about $1.70 per million British thermal unit (Btu) over for the first half of June have been low but expected by futures markets to approach $3 per million Btu before the end of the year, particularly as associated natural gas production from oil drilling is expected to diminish.

Critically, this shift toward dedicated natural gas drilling is an important industry dynamic. For the first time, dedicated natural gas drilling in Appalachia (Ohio, Pennsylvania, West Virginia) and the Haynesville formation (East Texas and Louisiana) represented nearly 90% of U.S. natural gas drilling, per Baker Hughes. 

All of this has been made possible by record high productivity trends in drilling new natural gas wells, according to EIA estimates. Additionally, the requisite market price to at least break even in drilling a new well has remained competitive with recent low market prices per BTU Analytics (subscription).

In summary, the underlying fundamentals still appear constructive and should position the U.S. natural gas and oil industry to participate in an economic recovery. 

And if the third-party consensus is correct the next year or so could bring positives for U.S. and global energy.