Crude price to affect domestic growth
Expect to see a continued difference between what a barrel of Brent crude gets on the open market, compared to a barrel of West Texas Intermediate.
The price of a barrel of international benchmark Brent closed Monday at $ 58.91 a barrel. Domestic benchmark West Texas Intermediate closed Monday at $52.83.
The difference is wider than it was just a couple of years ago, when the U.S. still was dramatically boosting its output of crude and there was a healthy global demand for its product.
A senior analyst for Evenrus, an on-demand software and data analytics company that follows the industry, said this month he sees that trend of a widened differential between the two to continue into 2020 as global demand growth slows and as domestic producers continue to look for places to sell their crude.
Sarp Oz kan, Env er us' director of energy ana lysis, attributes the shift in the global market primarily to the fact the U.S. has lost its two biggest importers of its light, sweet crude.
The collapse of Venezuela's government (and its state-run oil company), he observed, took out domestic exporters' largest global importer, Curacao, a Caribbean island just north of the South American country.
Curacao's imports had been getting blended by Venezuela's state-run oil company with its heavier, sour crude to create blends suitable for use in a variety of markets.
The other significant export market loss, Ozkan said, was China, which stopped importing U.S. crude as part of the trading dispute between the two nations.
“We were sending about 500,000 barrels a day to that market, until it all stopped once the trade war kicked in,” Ozkan said. “Those barrels have been replaced by what I can only assume is Iranian oil.
“That is why we are seeing such a widening in differential. West Texas Intermediate exporters are trying to find a new home by pricing other barrels out.”
2020 outlook
Ozkan discussed that issue and others as part of an annual report Enverus released earlier this month that predicts growth in the production of domestic crude will slow this year.
The current average daily production of about 12.5 million barrels is expected to grow about 500,000 between now and the end of the year.
Beyond 2020, the compaany predicts that production could fall back to 2019 levels or expand significantly, depending on whatever pricing scenario is selected.
Generally, the report predicts that U.S. petroleum liquids inventories are expected to post large builds the first part of this year.
It expects domestic oil producers will spend less this year than they did a year ago.
While production growth is expected from larger independents and integrated oil and gas companies, it adds that will be muted somewhat by production declines from smaller operators that are struggling with liquidity issues.
Previously, Env er us predicted that growth in natural gas production across Oklahoma and the nation also will slow this year.
Ozkan said both liquidity and product pricing constraints are big issues for Oklahoma producers.
“It isn' t that the rock in Oklahoma is bad, by any stretch of the imagination,” he said.
Oz kan said part of Oklahoma's recent slowdown can be attributed to production results companies realized after downspacing experiments were conducted.
Those results, he remarked, degraded average well production rates across shale plays in the Anadarko Basin.
Additionally, free cash flow pressures from equity investors have changed the way many companies are operating, he said.
“The SCOOP/STACK has world class economics, but spacing and well parent-child relationships have to be carefully considered.”
Future demand
Ozkan said the U.S. needs growing global demand for its product to generate needed pricing signals to get the industry moving once again.
That is because much of the added production coming from U.S. shale fields already is supplying domestic refiners with all the light-sweet crude oil they can use.
“Every single molecule of future oil and natural gas growth that we will produce will have to be exported ,” Ozkan said.
“It is pretty competitive out there, given the oversupply situation we have had for several years now."