Oil price matters to gas market again

OREANDA-NEWS. October 17, 2016. Global crude prices, the Permian basin rig count and China's economic growth outlook will influence US natural gas markets as relationships between disparate fundamentals reshape energy investment over the next few years.

Oil, gas and NGL markets are more interconnected than ever, Dawn Constantin, BP Energy's vice-president of marketing and fundamentals, told attendees at this week's Rockies and West LDC Forum in Denver, Colorado. The interconnections will make it harder to figure out future price direction.

"The North American puzzle is way bigger than it used to be because of how North American (shale gas) has changed the world," Constantin said.

While gas prices are no longer directly linked to oil the way they once were, the timing and price at which oil market demand and supply balance will be important in determining not only how much future US gas drilling is needed but where that production will come from and how prices respond, she said.

"Oil price matters," said Constantin. Some expectated that the global crude market would rebalance before the end of the year at about \\$70/bl. Now, the rebalance is not expected until next year. Exploration and production companies have slashed spending and each will move forward differently to invest in future production, she said.

As US oil production peaked in 2015, associated gas output reached 20 Bcf/d from four production regions: the Permian basin, the EagleFord, the Bakken and the Niobrara, Constantin said. Two Texas production areas, the Permian and the EagleFord, accounted for about 12 Bcf, or 60pc of that gas.

Looking ahead, oil prices of around \\$70/bl will likely boost drilling activity and associated gas output, especially in Texas. That supply would be geographically close to rising demand expected to export to Mexico and from Gulf Coast LNG facilities as well as to serve industrial demand in Texas and Louisiana. "You don't potentially need as much supply to come in from the Haynesville and the Marcellus" in that scenario, Constantin said.

If the oil market rebalances around \\$50/bl, Constantin described a scenario under which new oil drilling activity might not be as robust, allowing gas from other US basins to compete for growing demand.

Global crude prices are also key to future NGL market activity and whether US LNG exports are in demand around the world. While US LNG facilities have been under development for several years "the world has changed," Constantin said.

If a need for US LNG exports doesn't emerge because of a global supply glut, "the fear is that is what doesn't flow is the US Gulf Coast gas."

Potential acceleration of US gas exports to Mexico also creates scenario for US gas-on-gas competition.

An increase of 2-3 Bcf/d of demand from Mexico might not result in price appreciation, Constantin said. At a lower oil price and less associated gas production, supply from the Haynesville or Marcellus might be needed to meet demand. At higher oil prices, less Marcellus gas might be needed to supplement high levels of associated gas from Permian and south Texas production areas.

A larger increase in gas demand from Mexico and significant global LNG demand requiring 9-10 Bcf/d would create more outlets for gas from the Marcellus and Utica areas, she said. "It all depends on the oil price," Constantin said.

ICF vice-president Kevin Petak said production from the Marcellus and Utica formations may climb to 40 Bcf/d by 2025 while output from other eastern US fields averages between 40-45 Bcf/d. Western US gas production is projected to remain flat at 13-14 Bcf/d.

Despite global market implications, weather remains the most important near-term driver for gas prices.

"A cold winter in North America has a much, much bigger impact on demand imbalances than a hot summer," said Constantin.