Normalcy Returning to Natural Gas and Oil Markets

Dean Foreman
Posted December 17, 2020

Celebrating normalcy long has marked Americans’ emergence from a variety of national crises. It’s the same with COVID-19. As we emerge from the pandemic, we dearly want to celebrate a return to normal. Thankfully, as the economy recovers, natural gas and oil are doing their part.  

API’s new Monthly Statistical Report (MSR) and quarterly Industry Outlook show our oil industry’s fortitude and resiliency through an unprecedented period.

In November, API’s primary data on U.S. petroleum markets showed that total U.S. petroleum demand returned to 19.1 million barrels per day (mb/d) and back to the five-year range – a measure of normalcy – propelled by higher demand for diesel, jet fuel and other oils (that is, naphtha and gasoil going into refining and petrochemicals).

Through the U.S. energy revolution, large productivity gains have become a “new normal” for the industry, and as a result U.S. supplies of crude oil and natural gas liquids (NGLs) combined to rise by 0.3 mb/d in November despite historically low numbers of new wells being drilled. Meanwhile, the U.S. sustained its status as a petroleum net exporter, as inventories grew and prices remained historically low. 

Here are the highlights from this month’s MSR, again, based on November data:

• Total U.S. petroleum demand returned to 19.1 mb/d and the five-year range.
• Growing U.S. production of crude oil (11.1 mb/d) and NGLs (4.9 mb/d).
• Refinery throughput (14.4 mb/d, 77.2% capacity utilization) rose following three consecutive monthly declines.
• With the lowest imports in 29 years, the U.S. was a petroleum net exporter for a fifth consecutive month.
• Inventories of crude oil and total petroleum were at their highest levels for the month of November.

Our November observations – on domestic natural gas and oil productivity gains, the displacement of imports and the benefits of increased productivity and lower imports to the bottom line of U.S. households – are reinforced in the latest quarterly Industry Outlook, which we have discussed here, here and here.

In a nutshell, the points in the graphic above suggest that above-average global economic growth over the next two years seems likely, based on estimates that largely preceded encouraging recent vaccine progress – reflecting the traction gained by more than $15 trillion of global economic stimulus efforts so far.

As the economy goes, so generally do the markets for oil and natural gas. 

The U.S. Energy Information Administration’s (EIA) December outlook suggests global oil demand could rise by 5.8 mb/d (to 98.2 mb/d in 2021). Coupled with the natural decline of global oil production, which by International Energy Agency (IEA) estimates generally amounts to as much as 6% per year, global markets may require an additional 4.0 mb/d to 6.0 mb/d of new oil production in addition to meeting prospective demand growth.

If oil markets recover as expected, a key question for U.S. producers and economic growth is who ultimately will supply that market. EIA’s current projection is that all proverbial boats should rise, and, based on estimated productivity gains coupled with key pipeline infrastructure expansions for oil and natural gas, the Permian basin appears well-positioned to participate in a recovery.

As with oil, natural gas markets globally traversed a course with oversupply, productivity gains and historically low prices earlier this year but have recently seen that transition to a recovery in demand and U.S. exports. In fact, U.S. natural gas exports – via pipeline and liquefied natural gas (LNG) -- hit a record total 16.9 billion cubic feet per day in November, according EIA, split about evenly between exports via pipeline and LNG.

This reinforces the importance of global prosperity and trade relations – especially across Europe and Asia – as well as with Mexico and Canada, with whom supply chains are integrated across the energy complex and manufacturing. 

In general, the fall and rise of U.S. industrial production has been something that was anticipated by API’s economic indicator, The D-E-I^™PP(distillate/diesel economic indicator) that continued to signal an economic recovery in November.

Bringing it all together, the encouraging signs – and in API’s view reasons for cautious optimism – are that key enabling energy demand and production have re-balanced and remained ample; trade flows have resumed course; and consumer prices have remained historically low.

Ultimately, while there invariably will be follow-on impacts to come from the 2020 COVID-19 recession, the normalcy of the intertwined and inextricable linkage between economic and energy demand growth – and all these imply for energy markets – is something to celebrate in and of itself.