As the conflict in Ukraine appears to be flaring up again, as missiles are launched against energy and city targets, there’s certainly a couple of areas related to the conflict beating a retreat, but sadly it’s not the sound of Russian tanks and boots. The retreat is more visible in the oil and gas markets themselves, but also in future production profiles, especially in the U.S., where the initial surge in output that tagged on to the invasion, and the sanctions that followed, is starting to dissipate. In fact, some are even saying the boom in oil production we have seen from the U.S. shale revolution over the last 10 years is reaching a peak and may well start to fade sooner rather than later.
The writing has been on the wall for some time now, but commentators had always hoped that new wells would materialise into the big gushers of old, especially those found in the Permian Basin. However, there is now increasing data showing that the best wells are in the past, while the future ones are less prolific, and are struggling to replace those wells getting depleted in the recent run-up in oil prices. Without doubt the crazy drilling programmes employed prior to the COVID years, if put in place now, would exhaust oil recovery at a faster rate than anyone would have envisaged. In fact, the golden torch that is the Permian Basin could well have reached the dreaded “plateau” mark already. It’s this feeling of the on-set of stagnation that has raised a few eyebrows, especially in Houston at the CERA conference this week. They’re even saying that crude oil supply will again swing back into the domain of OPEC, and we know what that could mean.
Data analysts have been showing recently how the so-called “sweet spot” wells in parts of the Permian are showing output numbers 15% less than a similar well some 5 years ago, even going as far as saying well production on average is down at least 5% year on year. This masks the success of the past where U.S. crude oil production has jumped from just over 7 MM Bbls/d in 2013 to a peak immediately before COVID of 13 MM Bbls/d, but we’re still not back to pre-pandemic levels. As we have explained before, the shale producing company is a totally different animal than we were seeing in the early shale years. As oil prices were hit by demand destruction, shale producers practically had the door shut on them when it came to accessing the easy money they had become used to, as investors started to pile on the pressure for spending budgets to be cut, the shift to greater margins over higher production levels, and so on. Wall Street wanted higher returns and that’s what Wall Street got! In the meantime, supply chain issues, and water supply problems, simply made the hopes of keeping production growth less likely. Recent EIA numbers speak for themselves, with the expected growth of 560M Bbls/d in 2023, year over year, being only half of the level predicted prior to COVID.
Brent and WTI prices have also been somewhat on the retreat this week, although better news filtering through slowed the declines by Friday, encouraging a little bounce. The focus had been on the Federal Reserve and those fears of interest rates continuing their upward trajectory, especially as Reserve Chairman Jerome Powell publicly backed more rate hikes to curb renewed inflationary pressures. But strikes in France, a drop in U.S. crude inventories and a faltering U.S. Dollar did offset some of the fears permeating through the market. As for natural gas, Henry Hub was also in retreat back down to $2.50/ MMBtu, while the Dutch TTF price was doing the same thing, hitting lows last seen in the summer of 2021, around $13/ MMBtu.
As for LPG, well it was one of those weeks where market players met up in far away places, hearing presentations they’re probably not that interested in, enduring meeting overload, and a degree of jetlag to boot, especially those venturing over to Tokyo. In the US market movers were also registering the retreat of Mont Belvieu propane prices, down from 90 c/g at the beginning of the week to around 81 c/g by Friday’s close. Although the four-week average for propane exports is standing at over 1.6 MM Bbls/d, last week saw another export drop to barely above 1.35 MM Bbls/d, and this is sending increased worries throughout the sector, especially as the U.S. inventory numbers are starting to show drawdowns easing back, while overall storage levels continue to be way up on recent years. Also production numbers, although unlikely to reach previous expectations, are still nudging back up to the 2.4 MM Bbls/d mark. So weaker Mont Belvieu prices, coupled with terminal fee resale premiums edging down, with talk of no more than 7 c/g, is certainly doing its bit to improve the ARB, and the ARB responded with a reversal of last week’s narrowing, pushing back to the $190/ Mt level. Weaker netback numbers at the beginning of the week were a concern, but the market appears to have been bolstered by freight levels easing back.
Of course Asia was expected to have a quiet week, and it didn’t surprise us. The BBC’s Gary Lineker was politically more active on his Twitter feed here in the UK than the WhatsApp pings of LPG players in Asia. The Asian “window” appeared only to be going through the paces, with no transactions recorded. Some physical PDH buying into China did get registered, but it was probably a little less than normal, with April FEI plus highish $30s/ Mt prevailing. At least the propane/ naphtha spreads are holding well, with 20% discounts applicable in NW Europe, way above my old 10% rule of thumb, but there’s no rush in buying, despite 300,000 Mt expected to arrive in the next month. All that could really be said of demand is that it held its own in Asia and Europe, allowing netbacks to recover from sub $5/ Mt midweek to the higher single digit from Asia.
Although the VLGC market did ease off over the week, I can’t call it a retreat, more an adjustment. In fact, it’s still looking tight to me as early April ships in the U.S. are hard to find, while more cargoes in the balance of the month must surely keep the market balanced, to tight. Throw in 18 day delays northbound and a week southbound via the Panama Canal, load port delays in Houston, a remnant of previous foggy conditions, but a warning of what maybe’s to come, and confident shipowners, buoyed by the cash they are earning in the market itself, but also from a successful cashing-in on the sale of older tonnage.
It’s starting to again look as if U.S. producers need to take the brunt of the slack on prices in order to allow the market to absorb excess LPG volumes in the form of consumption, not in a bulging Mont Belvieu salt dome storage, and all the issues that might bring.