E&Y: North American oil, gas industry staves off geopolitical strife in 1Q

The North American oil and gas market started the year on a good note during the first quarter as a cold winter brought relief to producers and refiners while Mexico progressed on energy reform, Ernst & Young said in its US quarterly report on the industry.

Even with lingering geopolitical risks in the Middle East, North Africa, and now Russia and Ukraine, E&Y said it expects market dynamics to remain positive during the rest of 2014.

“We are probably looking at some short-term seasonal downward pressures on both oil and natural gas prices, but we’re looking for moderately strong demand growth over the second half of the year that should support prices,” said Deborah Byers, E&Y US oil and gas leader.

Oil, gas prices

Global oil prices have stayed relatively high despite supply gains, as demand has stayed strong with the rebound in economic growth, supported by extreme weather around the world.

Crude prices in the US edged higher in the first quarter because of strong winter demand for crude as well as continuing infrastructure capacity growth, which served to further narrow some of the differentials for US crudes. US oil production expansion continues to be strong, though impacted by some shut-ins caused by cold weather.

Gas producers in the US experienced strong demand resulting in US gas storage levels reaching record seasonal lows. Spot gas prices averaged more than $5/MMbtu for the first quarter, with daily spot averages exceeding $8/MMbtu in early February.

This year’s first quarter contrasted greatly with first-quarter 2012, when an abnormally warm winter resulted in record high gas-in-storage, cutting prices to less than $2/MMbtu.

US gas production remains relatively high and the higher prices will incentivize further production. Prices will likely need to remain reasonably high to incentivize the necessary storage build over the summer, but higher gas prices will slow the switch from coal to gas in the power sector, E&Y said.

Elsewhere in the industry

Refiner margins increased during the first quarter despite some upward pressure from crude prices, as product prices were boosted by strong winter product demand.

Notional cracking margins on a New York Mercantile Exchange 3-2-1 basis averaged about $21.50/bbl in the first quarter, up from an average of about $18.75/bbl in fourth-quarter 2013. Average margins were up for the quarter across all of the refining regions, with margins in the Midwest remaining the strongest.

Led by international drilling, total global rig counts continue to rise, but rig activity in the US continues to disappoint, E&Y said, as upstream operators are becoming more cautious in their spending plans.

Expected spending increases of 5-7% are expected to be less than those estimated for 2013 of 8-10%. At the same time, pressures on operators’ cash flows are being reflected as pressures on service companies to control costs.

Global oil and gas transaction activity in the first quarter was broadly similar to activity in first-quarter 2013 and first-quarter 2012, but down from last quarter. North American oil and gas transaction activity, meanwhile, was down for the quarter and remains relatively weak (OGJ Online, Jan. 29, 2014).

“A more conservative consensus on prices and a relentless focus on cost-cutting and operational efficiency have tempered the growth agendas for many companies,” said Jon McCarter E&Y Americas oil and gas transactions leader.

“But, with credit conditions improving and some evidence of increasing appetite for debt, strong IPO and spin-out activity, and some evidence of a narrowing of the valuation gap in certain corners of the market, we do expect to see some modest recovery in activity over the rest of the year,” he projected.

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