Today’s report (week ended 5 Jul): EIA net change: +81 bcf, EA: +82 bcf
- Today’s print was once more higher than consensus, which appears to have underestimated the impact to demand from the Fourth of July holiday. To true-up to the reported injection, we downwardly revised our estimate for supplemental fuels.
Next Thursday’s report (week ending 12 July): EA preliminary: +54 bcf
- A 0.8 bcf/d w/w increase in power and the return of 1.8 bcf/d in the industrial sector following the long holiday weekend has helped to drive the injection rate lower. We estimate total supply is down by 1 bcf/d w/w.
Tropical Storm Barry update
Tropical Storm Barry has already brought GoM production down to 1.3 bcf/d today per flow data. However, while potential supply-side losses are garnering attention, Gulf storms now have the potential to be net-demand destructive events. Feedgas demand has already turned down to 3.0 bcf/d at Sabine Pass as available storage capacity dwindles, standing at about 55% full. At today’s feedgas rate, storage would be exhausted in less than three days without a ship loading. For Cameron, the facility could continue to take in 0.5 bcf/d of feedgas for 10 days based on the current feedgas rate and capacity utilisation at its storage facilities. In addition, industrial demand impacts and potential power losses would be additive to demand losses. Depending on how long ship traffic is disrupted, the storm activity could make balances even looser.
As news of platform evacuations and shut-ins has cropped up, so too has the forecast CDD count for July 20 and beyond, which added more CDDs in this morning’s weather run. We still expect strong burns starting 16 July through 20 July as pop-weighted CDD counts average near 15/d, easily outstripping both the 10-year normal and last year’s count. Those shifts in forecast have the potential to outweigh the Gulf disruptions, especially given the market’s short bias.
The Waha curve on ICE continues to suggest the market is expecting partial relief to the gas glut in the Permian ahead of 1 October, the in-service date of Gulf Coast Express. Market chatter continues to focus on a potential early start-up of some portions, as at present levels of production, even partial capacity could provide some relief to Waha basis. However, given the looming additions to oil infrastructure and the start-up of Enterprise’s Orla 3 gas processing plant in Reeves County earlier this week, even more incremental associated gas production is likely to flood the market before all of Gulf Coast Express enters service. The oil output that will be used to provide linefill for the 0.4 mb/d EPIC NGL lease and partial service on the 0.67 mb/d Cactus II will mean even more gas production, which risks further weakening Waha basis and increasing flaring. At the current average gas-to-oil ratio (GOR) of 3.2 mmcf of gas per thousand barrels of oil, some 0.8-0.9 bcf/d of added associated supply would potentially enter the market before Gulf Coast Express fully enters service on 1 October.
Previously, when major oil takeaway projects came online, they correlated with a spike in the flare count (the number of unique locations where natural gas is flared into the air) derived from the National Oceanic and Atmospheric Association’s (NOAA) satellite data. These spikes (see Fig 1) coincided with the start-up of the Midland to Sealy pipe in November 2017 and Plains All American’s Sunrise expansion in November 2018. Another spike in flare count in Q3 19 is likely, especially given how taxed the gas pipeline system is.
The flare count in April 2018 was 2,071, with Reeves County alone accounting for 29% (see Fig 2). Increases in the following 12 months were mostly from other counties. By April 2019, the total rose to 2,995, up by 45% y/y (see Fig 3). The number of counties where more than 200 flare locations were captured by satellite systems increased from three to six. The highest counts were in the Delaware, which is now home to approximately 50% of the Permian’s oil production (vs 35% five years ago) and features a significantly higher GOR of 4.2 (vs 2.2 in the Midland).
Flaring has acted as a relief valve for constrained Permian gas production, as demonstrated by the flare count and the amount of permitted flaring that we track monthly from the Rail Road Commission of Texas (RRC) that currently stands near 0.5 bcf/d. But given the RRC levies a 7.5% severance tax on the market value of gas produced and saved, that relief valve should not be thought of solely through the lens of a producer. Assuming flaring keeps gas prices less depressed as the pipeline system is less taxed and production avoids some shut-ins, levied severance tax revenue should (all else equal) be higher in Texas.
While our outlook is more bearish versus the ICE curve for Waha, we still expect low positive prices, though the possibility of some days of negative pricing cannot be ruled out. With that pricing outlook in mind, we looked at a well’s revenue per barrel of oil produced—assuming $55/barrel oil and both -$0.20/mmbtu gas and a Waha price of -$5.79/mmbtu, in line with the lowest settlement price ever in the basin, where the x-axis represents the GOR Waha gas prices at low positive (or even marginally negative) prices still do not look to have a major impact on a well’s revenue. However, at that abnormally low price of $-5.79/mmbtu, the cost of gas weighs on the breakeven of the well. A growing gas surplus could threaten liquids production, or at the very least boost the required crude breakeven price.
|Fig 1: Flare count, gross production, takeaway||Fig 2: Top 10 counties for flare count, April 2018|
|Source: BOEM, EIA, Energy Aspects||Source: Drillinginfo, Energy Aspects|
|Fig 3: Top 10 counties for flare count, April 2019||Fig 4: Revenue per barrel of oil produced ($) by gas-to-oil ratio (mcf/b)|
|Source: BOEM, EIA, Energy Aspects||Note: Assumes a -$0.20/mmbtu Waha gas price
Source: Drillinginfo, Energy Aspects
|Fig 5: Revenue per barrel of oil produced ($) by gas-to-oil ratio (mcf/b)||Fig 6: Weekly EIA storage change, bcf|
|Note: Assumes a -$5.79/mmbtu Waha gas price
Source: Drillinginfo, Energy Aspects
|Source: EIA, Energy Aspects|