Energy Gains in 2019 Set Stage for 2020

Dean Foreman
Posted December 19, 2019

In this year-end edition of API’s Industry Outlook and Monthly Statistical Report (MSR) for December 2019, we make a toast to the natural gas and oil industry’s year of achievement and look forward to what appears to matter the most to U.S. energy consumers, producers and markets. 

The Full Glass

Record U.S. natural gas and oil production, demand and exports – coupled with low prices – and regional economic growth have been supported by new resource and infrastructure developments.  Real domestic West Texas Intermediate (WTI) oil prices in 2019 have remained at about half of what they were 2011-2014, but with more than double the amount of home-grown oil production in 2019 compared with 2011. This has been an unabashed win for consumers, and it also has rejuvenated investments in resource development, processing, transportation, manufacturing and petrochemicals, as we discussed here.

Resilient global markets weathered geopolitical tensions and trade frictions – where, for example:

1. The world briefly lost a record amount of Saudi Arabian oil production capacity in September, yet low prices have persisted; and,
2. The world’s largest energy importer, China, all but shut off its oil and natural gas purchases from the U.S. for months, yet other markets around the world surfaced and helped compensate.

If the loss of Saudi Arabian capacity had happened just five years ago, we could have begun with oil above $100 barrel and moved up substantially from there. U.S. consumers have been cushioned through tumultuous times by domestic production. 

A U.S. energy revolution that’s set up for the longer haul is indicated in a number of metrics. The U.S. saw strong natural gas and oil productivity trends and cost-effective production, even at recent low prices. We track drilling productivity, as reported by the U.S. Energy Information Administration (EIA), and requisite natural gas and oil market prices for a producer to break even when drilling new wells in different regions, as estimated by BTU Analytics. These indicators have remained fundamentally sound, showing productivity gains and potential drill well profitability at recent market prices – again, indicating surging American natural gas and oil production has staying power.

The Glass Half-Full

U.S. pipeline infrastructure expansions in the Permian Basin appear to have increased by 1.1 million barrels per day (mb/d) of new oil transportation capacity, plus 5.0 billion cubic feet per day (bcf/d) of new natural gas transportation capacity. These developments should go a long way toward alleviating bottlenecks and enable petroleum markets to work more efficiently, which furthers potential consumer benefits. 

However, the natural gas and oil industry’s challenges to expand or even renew pipeline capacity across other U.S. regions have remained prominent, especially concerning U.S.-Canadian oil trade. Due to the quality and geographic location of crude oil, the U.S. must continue to import and export oil, as we discussed here, but U.S. refiners are increasingly utilizing the abundant light sweet crude oil that burgeoned as a result of the energy revolution.

A record slate of U.S. Liquefied Natural Gas (LNG) projects has emerged despite currently low global natural gas prices, which in Europe and Asia Pacific averaged $5 to $6 per million Btu in October compared with double-digit prices historically. In recent years, low LNG prices scared off investors for new projects, but in 2019 the U.S. has seen an unprecedented number of affirmative final investment decisions.

This is absolutely great news for the U.S., but challenges to build all of these plants – many of which are geographically concentrated and ideally would start construction sooner than later – must be surmounted. Shortages of specialized craft labor, such as high-pressure welders, could become constraints. There are alternatives to modularize construction and employ work yards internationally, but these can entail tradeoffs in the cost, quality, complexity and risks to manage the projects. So, a record project slate is one thing, but successful project execution, particularly amid trade restrictions, will require strong enabling policies.

The Glass Half-Empty

Slower economic growth. The Wall Street Journal recently opined that “It’s Not the Economy Anymore, Stupid,” suggesting voters have become insensitive to economic growth. A sense of complacency following an extended period of economic expansion may be expected, but for energy we saw the tide begin to turn this year.

API’s most forward-looking tool is the API D-E-I™, the distillate economic indicator that we began publishing one year ago as a part of the monthly reports. For an entire year, the D-E-I™ has been spot-on in signaling that the industrial side of the U.S. economy would lead toward slower economic growth. 

In fact, the U.S. economy slowed to a pace of 2.3% annual growth in 2019 from 2.9% y/y last year. At the same time, the global economy expanded at a pace of 2.6% y/y on a market exchange rate basis, which by historical International Monetary Fund (IMF) norms is just above the cusp of a global recession.  While the Bloomberg consensus expects global economic growth to stabilize near similar levels for the next two years, the U.S. real GDP is expected by the consensus as well as official estimates to slow below 2.0% y/y and remain so through 2021. And this slower outlook was an upgrade over their previous U.S. growth outlooks, which last year suggested a bottoming towards 1.5% y/y growth by 2021.  Implicit within these expectations is some normalization of international trade relationships, which has remained a timely wildcard. 

2020 Point of Departure

To continue the U.S. energy revolution, it’s ultimately a matter of further growth being enabled by infrastructure and markets. API’s latest Monthly Statistical Report (MSR) estimates that in November 2019 the U.S. delivered a combination of:

• A new crude oil production record of 12.8 mb/d in November – No. 1 in the world;
• The greatest petroleum demand for the month of November, 21.0 mb/d;
• Solid U.S. petroleum exports above 8.0 mb/d despite global headwinds; and,
• Relatively low oil prices (down more than 20% y/y) with 13 consecutive months of year-over year inventory growth.

Notably, the record production came despite a third consecutive quarter of increasingly slower drilling activity. U.S. petroleum production and export growth were enabled by productivity gains, coupled with new pipeline infrastructure in the Permian Basin that has enabled more efficient markets, which reinforces our opening point about resiliency. 

There’s a lot from 2019 the industry can be proud of, but when drilling activity and production growth trends gravitate in opposite directions, there’s naturally some limit as to how far that divergence can go. Enabling domestic and export infrastructure – and healing international trade relationships – would be the bedrock for a sound point of departure for energy markets in 2020.