Major producers’ output cuts supported a 40% rally of crude oil prices in the first 4 months of this year. However, concerns of slowing oil demand growth are becoming salient on rising trade tensions and a decelerating global economy. Crude prices slumped 16% since late April until the recent rally backed by growing tensions in the Middle East.
The outlook for the global economy as well as oil demand growth rest, in part, on policy outcomes associated with trade tensions. The range of outcomes remains wide. In response to decelerating activity, the major central banks, including the Federal Reserve, are adopting, or considering, more accommodative monetary policies to promote economic growth.
World oil demand is now anticipated to rise 1.2 million b/d this year, according to the International Energy Agency’s latest forecast, compared with an assessment of 1.4 million b/d in January. Demand growth is projected to improve in this year’s second half from the sluggish performance seen in the first half, thanks to lower oil prices, expected rebounds in refinery runs and petrochemical demand, and likely tailwinds of the looming International Maritime Organization (IMO)’s low-sulfur fuel rule.
Oil demand from countries in the Organization for Economic Cooperation and Development is projected to rise 110,000 b/d this year, down from 300,000 b/d a year ago, while non-OECD countries will drive oil demand growth by adding an estimated 1.07 million b/d in 2019, up from 900,000 b/d a year earlier.
The Organization of Petroleum Exporting Countries, Russia, and nine other non-OPEC countries—OPEC+—have more than delivered on their 1.2 million b/d supply cut in the hopes of reversing the substantial stock builds in 2018. OPEC crude production has contracted by 2.4 million b/d from last November to this May, driven by a combination of over-compliance of members participating in supply cuts, especially Saudi Arabia, and lost barrels from Iran and Venezuela.
Amid rising demand concerns and strong non-OPEC production growth, the call on OPEC crude continues to decline and OPEC’s continued policy for rational guardianship is pivotal to the oil market. OPEC+ rescheduled their meeting in early July. Saudi Arabia has signaled that the curbs should be prolonged to avoid a repeat of oil’s price collapse 5 years ago.
Non-OPEC oil supply in 2019 is expected to rise 1.9 million b/d, following a robust increase of 2.8 million b/d in 2018. The US remains the main driver of non-OPEC supply growth this year. In addition, non-OPEC upstream activity appears set to start a new cycle of investment, supported by improved cash flow.
Despite higher spare capacity and increasing non-OPEC production, supply risks have never gone away. Heightened geopolitical uncertainties, especially rising tensions in the Middle East, could easily send oil prices to a rally.
At this stage, OGJ still forecasts a relatively balanced oil market in 2019 which is unduly reliant on rational policy outcomes on both supply and demand sides.
World economy
The economic weakness seen in the latter half of 2018 has continued in 2019. The escalation of trade tensions between major economies has been accompanied by a slowdown in global manufacturing and investment activity.
China’s economy slump continues despite a dash of stimulus amid the trade war with the US. In May the country reported the lowest industrial growth in 17 years. Economic conditions in the Euro area have deteriorated rapidly since mid-2018 because of weak manufacturing activity and a decline in exports. Uncertainty about the UK’s exit from the European Union also persists. The US economy remains solid, but downside risks are rising.
World trade growth has plunged. According to the latest data from the World Trade Monitor of the Netherlands Bureau of Economic Policy Analysis (CPB), growth of world trade volumes has plunged to 0.4% in this year’s first quarter, compared with a growth rate of 4.3% in first-quarter 2018. JP Morgan’s Global Manufacturing Purchasing Managers Index (PMI) in May posted its lowest reading since October 2012, signaling that world manufacturing has downshifted into contraction.
At the same time, private consumption in major advanced economies remains relatively robust, supported by solid labor market and wage growth. Financial market conditions have eased, as the major central banks are adopting more accommodative monetary policies, which should support growth in this year’s second half and into 2020. A handful of countries have employed sizable fiscal stimulus, although the support for growth varies.
According to the Global Economic Prospects of the World Bank released in June, global growth this year is projected to ease to 2.6% from 3% in 2018, before edging up to 2.7% in 2021. Advanced economies will expand 1.7% this year, down from 2.1% in 2018. Emerging market and developing economies will grow 4%, down from 4.3% last year. The latest macroeconomic forecasts of the OECD show that global growth is set to slow to 3.2% this year from 3.5% last year before rebounding to 3.4% in 2020.
World oil demand
With the escalation of the trade war and a global economic slowdown, IEA has consecutively downgraded the forecast of global oil demand growth for this year. World oil demand is now forecast to increase 1.2 million b/d in 2019, down from an initial forecast of 1.4 million b/d in January, according to the latest monthly oil market report.
For this year’s first quarter, oil demand is estimated to have risen by just 250,000 b/d year-on-year—the lowest annual growth registered since the end of 2011. Lower growth in the petrochemical industry and warmer-than-normal weather in the northern hemisphere were contributory factors in addition to anemic economic growth.
The underperformance also was partly driven by heavy refinery turnarounds early this year. Global refinery throughput in May was at its lowest level in 2 years because of maintenance and unplanned outages. By August, refinery runs could be more than 4 million b/d higher. The increase of global refinery runs from the seasonal trough would help with oil demand growth over the course of this year.
Lower oil prices and an expected rebound in petrochemical demand also are favorable to oil consumption in this year’s second half. New regulations on sulfur in bunker fuel implemented by the IMO at the start of 2020 are likely to boost gas oil demand from yearend and onwards.
Meanwhile, IEA’s estimate of 2018 global oil demand growth has been revised down to 1.2 million b/d from an original estimate of 1.3 million b/d, as actual 2018 data in large consuming nations, such as Egypt, India, Indonesia, and Nigeria, were lower than expected.
Oil demand growth for the OECD this year will be about 110,000 b/d—the slowest in 5 years—mainly because of slower economic momentum. The growth in petrochemicals, diesel, and jet fuel is largely offset by consumption declines for fuel oil, heating oil, and other products. However, growth will accelerate in 2020, thanks to solid expansion in the petrochemical industry and a more robust diesel and gas oil outlook.
OECD European countries’ oil demand will grow 0.5% to 14.37 million b/d this year. This compares with a forecast of 14.42 million b/d that IEA made at the start of the year. Economic growth in the Euro area is projected to slow from 1.8% in 2018 to 1.2% this year, according to the OECD Economic Outlook.
Demand in OECD Asia Oceania will decline consecutively this year by 130,000 b/d, or 1.7%, to 7.79 million b/d. Japan’s economic growth is forecast to weaken to 0.7% in 2019 and to 0.6% in 2020 from 0.8% in 2018. South Korean’s economic growth will weaken to 2.4% this year from 2.7% in 2018.
Demand growth in OECD Americas will slow to 180,000 b/d this year from 480,000 b/d last year. This number still registers the highest in all OECD regions, however. IEA expects the growth will accelerate in 2020, thanks to petrochemical additions.
Non-OECD demand continues to be relatively robust even though growth is clearly slowing in China. Led by other Asian countries, non-OECD oil demand will expand by 1.07 million b/d this year, following a 900,000-b/d growth rate in 2018, according to IEA. Non-OECD countries will remain the main engine of global demand in 2020, with growth expected to be 880,000 b/d.
Economic growth in China is projected to moderate from 6.6% in 2018 to 6.2% this year, primarily reflecting softening manufacturing activity and trade frictions. In the short term, Chinese oil demand should be supported by lower oil prices and the stimulus package put in place by the government. IEA expects growth of 450,000 b/d this year and a slowdown to 270,000 b/d in 2020.
In India, private consumption and investment will benefit from strengthening credit growth and accommodative monetary policy. India’s economic growth is projected at 7.5% this year, up from 7.2% last year. India’s oil demand is forecast to increase by 210,000 b/d this year and by 230,000 b/d in 2020, following a growth of 200,000 b/d in 2018.
World oil supply
OPEC crude oil production has been continuously declining. According to IEA data, estimated OPEC crude production over this year’s first 5 months averaged 30.4 million b/d compared with 32.4 million b/d in November 2018 when Saudi Arabia, the UAE, and Iraq were pumping at or near record highs. OPEC produced 29.9 million b/d of crude in May—the lowest for any month since July 2014.
The decline in OPEC production reflects Saudi Arabia’s over-compliance with the agreement of production cuts and falling Iranian and Venezuela production. OPEC’s effective spare capacity in May was 3.2 million b/d, with Saudi Arabia accounting for 2.3 million b/d, or 72%.
Continued restraint from Saudi Arabia made for robust overall compliance from OPEC members taking part in supply cuts. Saudi Arabia’s production over the first 5 months of this year averaged 9.94 million b/d, about 300,000 b/d below its 10.31 million-b/d supply target, and down from a peak of 11 million b/d last November. In May, Saudi Arabia produced 9.7 million b/d—the lowest level since 2015. According to Saudi Energy Minister Khalid al-Falih, the kingdom would keep output below its supply target in June and July in order to drive inventories down.
Venezuela’s oil output fell sharply upon the imposition of US sanctions in January and severe power outages. Oil output is down 35% from 1.24 million b/d in January to just 810,000 b/d in May. Kpler data show that since sanctions were announced, shipments to the US have ground to a halt. China and India, however, have continued to lift their imports from Venezuela.
Crude production in Iran stabilized at about 2.73 million b/d in this year’s first quarter compared with 3.8 million b/d over first-quarter 2018. After the US ended sanction waivers, crude production in Iran tumbled to 2.4 million b/d in May—the lowest level since the late 1980s. Exports fell more sharply to 810,000 b/d in May compared with an average of 2.6 million b/d a year ago.
In 2018, non-OPEC oil supply experienced a robust growth of 2.8 million b/d, led by the gains of 2.2 million b/d in the US.
In its latest Oil Market Report, the IEA expected non-OPEC oil production to average 64.58 million b/d in 2019, 1.9 million b/d higher than the 2018 level. The majority of non-OPEC supply growth this year still comes from the US, with an estimated gain of 1.7 million b/d. Growth of international non-OPEC supply (excluding the US) will come from Brazil, Russia, Australia, and the UK, while supply declines will mainly be seen in Mexico, Kazakhstan, Norway, Indonesia, Canada, and Vietnam.
Additionally, as a result of higher cash flows, non-OPEC upstream sanctioning activity appears set to reach an all-time high this year, marking the start of a new cycle of investment. A total of 252 oil and gas projects are anticipated to be approved this year in non-OPEC countries. Meanwhile, major project start-ups, most notably Guyana, Johan Sverdrup, and projects in Brazil, will support volumes for the next couple of years.
Canadian production is expected to progressively come back online, with rebounded Western Canadian Select prices and the end of government curtailments. However, the mandated temporary production adjustments are leading to a contraction in Canadian growth this year. Meanwhile, three important pipelines, including the Enbridge Line 3 Replacement, Kinder Morgan Trans Mountain Express, and TransCanada Keystone XL will provide more takeaway capacity for Canadian oil next year. Before that, capacity will have a natural ceiling.
North Sea production declined as the increase in UK production failed to offset steep declines in Norway. However, Norwegian oil production will get a boost next year from the start up of giant Johan Sverdrup field. Meanwhile, Shell, ExxonMobil, BP, Equinor, and others are now active in developing their own offshore presale projects in Brazil. With increased involvement by foreign operators, multiple projects are scheduled to begin producing over the coming years.
Along with OPEC, Russia agreed to a 6-month production cut through June and has been partially compliant over the past several months. Russian’s output fell below its supply target for the first time in May due to contamination along the Druzbha line. Russia is poised to ramp volumes in several fields over the coming years.
OECD inventories
OECD industry stocks stood at 2.88 billion bbl at the end of April, almost the same level as at the beginning of this year. Total stocks were 50 million bbl above the year-ago level and 16.3 million bbl above the 5-year average. But on a forward demand basis, they are below the 5-year average, by 1.6 days, at 59.9 days.
Crude stocks increased 12.8 million bbl in April, substantially more than the usual build of 300,000 bbl, to reach 1.1 billion bbl—the highest level since November 2017. Most of the growth came from US crude builds. Stocks of oil products fell by 7 million bbl in contrast to the 5-year average builds of 8.1 million bbl for the month.
Based on the revised demand forecast for this year and assumed OPEC crude output of 30.2 million b/d for the year and the resulting total supply of 100.4 million b/d, global inventories would be little changed for the whole year.
US economy, energy consumption
OGJ pegs this year’s US real gross domestic product growth at 2.7% compared with 2.9% in 2018, 2.2% in 2017, and 1.6% in 2016. According to the Bureau of Economic Analysis, the US economy expanded at an annual rate of 3.1% in the first quarter, topping expectations. Growth is likely to be weaker in the second quarter.
The recent fiscal stimulus has been supporting the near-term growth. The monetary policy is more accommodative than previously assumed. The unemployment rate has fallen to a 50-year low. The latest employment data from the Bureau of Labor Statistics showed that US nonfarm payrolls grew by 75,000 in May and the unemployment rate remained at 3.6%. With tightening labor markets, wage growth continues to accelerate, and the Consumer Confidence Index from the Conference Board has been hovering around decade highs.
However, May data showed some weakness in industrial production and business investment. The Institute for Supply Management’s PMI registered 52.1% in May, a decrease of 0.7 percentage points from April. This also is the lowest level since 2016. New tariffs imposed on China could disrupt supply chains and create more business uncertainties, putting downward risks to growth.
Despite higher wages, the inflation rate remains well below the 2% target, which provides the US Federal Reserve with room to cut rates in order to boost growth.
Primary energy consumption in the US reached a record high of 101.25 quadrillion Btu (quads) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. Supported by continued expansionary activity and lower oil and gas prices, US energy consumption this year will grow to 101.7 quads, OGJ forecasts. Fossil fuels continue to dominate US energy consumption, holding 68% of the market share this year.
US oil demand
US oil demand increased to 20.45 million b/d in 2018, up 490,000 b/d from 2017 and the highest since 2007, according to the latest data from EIA. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 because of increased demand for diesel and jet fuel. OGJ forecasts that, for 2019, oil demand will grow 1.3%, with the major growth coming from LPG and ethane as well as jet fuel.
For this year’s first half, estimated US gasoline demand was 0.1% lower than levels a year ago, averaging 9.25 million b/d. Gasoline demand in March averaged 9.17 million b/d compared with 9.45 million b/d a year ago, reflecting reduced personal travel due to adverse weather conditions and major flooding in the Midwest. After rebounding in April, gasoline consumption dropped again in May and 160,000 b/d lower than the same period last year. OGJ expects that gasoline demand will rebound during the rest of 2019, thanks to lower gasoline prices.
Distillate consumption was down 1.2% year-over-year through the first half. Distillate consumption was strong in February but declined dramatically in April and May. In April, distillate deliveries of 3.88 million b/d decreased 6.6% from March and 7% lower compared with April 2018. In May, distillate consumption was 3.9 million b/d, 8.6% lower from a year ago. The unexpected fall was explained by the facts that the weather was warmer than usual and the substantial floods in the Midwest hampered agriculture. OGJ estimates distillate consumption will return to year-over-year growth through the second half of this year.
Jet fuel demand has been continuously rising and is above the 5-year range over this year’s first half. Jet fuel demand over the first half has increased 2.2% year-over-year to 1.72 million b/d. US air traffic rose by 4.5% in February, with growth accelerating to 6.3% in March. It is the strongest growth seen since early 2016, reflecting booming economic activity and low unemployment. OGJ forecasts that for all of 2019, jet fuel demand will grow 3.7%.
Residual fuel oil demand was 277,000 b/d in the first half of this year, which represented a decrease of 8.6% vs. the same period of 2018. The structural shift with marine fuel sulfur regulations tightening at the beginning of 2020 have affected residual fuel oil demand.
LPG and ethane demand have been surging since 2017, backed on the expansion of the US petrochemical industry. Over the first half of this year, LPG and ethane consumption averaged 3.2 million b/d, 8% higher than year-ago levels. However, the growth rate has decelerated. According to the American Chemistry Council, with slowing global growth prospects and rising trade tensions, chemical exports are not performing as well as expected a year ago. OGJ forecasts that LPG and ethane demand will grow 7% in 2019, down from a 13% growth seen in 2018.
US oil production
US crude oil production keeps accelerating towards new highs, driven by the shale patch and new projects in the Gulf of Mexico. Despite pipeline capacity constraints out of the producing areas, US crude oil production in 2018 increased by 1.6 million b/d, or 17% year-over-year, reaching a record 11 million b/d. OGJ forecasts US crude output to reach 12.3 million b/d this year.
Exploration and production capital spending growth this year will decelerate as producers continue facing pressure by shareholders demanding capital discipline (OGJ, Mar. 4, 2019, p. 20). Baker Hughes reported a weekly average of 835 oil-targeted rigs in this year’s first half, up from a weekly average of 805 oil-targeted rigs in first-half 2018. However, oil rig counts have been trending downward since yearend 2018, responding to the decline in oil prices in later 2018.
Over this year’s first half, US crude production averaged 12 million b/d, standing 1.6 million b/d, or 15.5%, above the year-ago level, according to estimated data from EIA.
Meantime, the number of drilled but uncompleted (DUC) wells also is rising, primarily in the Permian region. According to EIA, the number of DUCs at the end of April was 8,360 compared with 8,100 at the start of the year. This could boost output later in the year even with fewer rigs.
The Permian remains the primary source of US production growth. According to EIA’s drilling productivity report, over this year’s first half, Permian production averaged 4 million b/d, up 27% from the same period a year ago. The number of DUCs has continued to increase to 3,971 at the end of May compared with 2,553 the same time a year ago.
The growth of Permian production is helped by the recent pipeline capacity additions that reduce some of the takeaway constraints since mid-2018. An extension to the Sunrise Pipeline added an estimated 120,000 b/d of takeaway capacity from the Permian region early this year, which increased pipeline capacity to Cushing. In addition, the Seminole-Red pipeline, which had previously delivered NGL from the Permian region to the Gulf Coast, was repurposed to deliver crude oil, adding an estimated 200,000 b/d of takeaway capacity. In total, the nine pipeline projects in the Texas area are expected to gradually add new take-away capacity of 5.4 million b/d through the first half of 2021. With the addition of takeaway capacity and rising stockpiles in Cushing, West Texas Intermediate Midland prices have been approaching WTI Cushing prices since the start of this year.
Eagle Ford production, over the first half of this year, averaged 1.41 million b/d compared with 1.27 million b/d for the same period a year ago. Production in the Bakken also increased 15% year-on-year, averaging 1.4 million b/d.
As a few new projects come online, the federal Gulf of Mexico production increased 3.6% in 2018 to 1.74 million b/d, marking the highest annual average and the second-largest US producing region for the year. Production is set to reach new records this year. The new projects include Shell’s Kaikias Deepwater project, Chevron’s Big Foot project, Hess’s Stampede project, and others. With earlier-than-planned production, Shell’s 175,000 boe/d Appomattox project will be a key growth contributor to help push the gulf’s oil production toward a new record high before yearend.
According to Wood Mackenzie, with growth from new entrants, exploration activity in the Gulf of Mexico is expected to increase 30% this year. Logistical and operational efficiencies, lower oil field service costs, scaled designs, and better engineering have combined to make the region more profitable than it was even before the 2014 industry downturn.
NGL output from gas processing plants this year will reach 4.95 million b/d, up 13.8% thanks to the strong momentum in gas production.
Refining
Year-to-date, refinery throughput and capacity utilization have been below year-ago levels. Dwindling heavy oil supplies, unplanned outages, and heavy maintenance, contributed to reduced US refinery activity.
Over the first 5 months of this year, gross inputs into US refineries averaged 16.62 million b/d, down from 16.94 million b/d during the same period a year ago. Refinery capacity increased to 18.8 million b/d from 18.6 million b/d a year ago, while utilization rate decreased to 88% from 91% a year ago.
Reduced medium and heavy crude oil supplies and rising prices have suppressed refining margins from coking and contributed to lower refining runs. Heavy oil imports from Venezuela have slumped to zero recently after Washington imposed a series of sanctions on the Venezuelan government as well as Petroleos de Venezuela SA (PDVSA). The narrowed crude differentials also come from production cuts in Canada and OPEC.
Meanwhile, unplanned outages due to weather disruptions in PADD2 resulted in dramatic declines of refining activity in this region. Refinery runs of this region were down by 600,000 b/d year-over-year in May, or around 16% of capacity.
In addition, further reconfiguration works in this year’s fourth quarter in preparation for IMO’s new sulfur regulations in ship emissions may continue to depress refinery runs.
According to Muse, Stancil & Co., over the first 5 months of this year, refining cash margins averaged $16.55/bbl in the Midwest, $14.05/bbl in the West Coast, $4.78/bbl in the Gulf Coast, and $1.77/bbl in the East Coast. Over the same period last year, these refining margins were $19.42/bbl, $16.91/bbl, $9.73/bbl, and $2.98/bbl, respectively. Refining margins were lower in all regions, largely because of narrower crude differentials and weaker gasoline margins.
For Gulf Coast refiners, gasoline crack spreads have turned positive in February and reached highs in April. However, the gasoline crack spread again dropped lower than the 5-year range in May, reflecting increased medium and heavy crude oil prices, gasoline stock builds, and gasoline consumption that were lower than year-ago levels.
Although the average US refinery crude slate remains medium-sour, the average API gravity on the US crude intake has been continuously increasing, as refiners process higher volumes of light, tight oil. Sulfur content is at the lowest level now since the 1990s.
Oil trade
Year-to-date, estimated US petroleum trade balance averaged 1.5 million b/d of net imports, which represents a big contraction from nearly 3 million b/d over the same period a year ago. Crude oil net imports averaged 4.3 million b/d for this period, down from 6.2 million b/d a year ago, reflecting higher exports and lower imports. Estimated product net exports, year-to-date, averaged 2.8 million b/d, down from 3.29 million b/d a year ago, mainly because of lower product exports.
According to data from the American Petroleum Institute, in the first 5 months of this year, crude imports—excluding imports from the Strategic Petroleum Reserve (SPR)—were 9.2% lower compared with the first 5 months of 2018. According to EIA’s Petroleum Supply Monthly, for this year’s first quarter—the latest data available—US crude imports averaged 6.98 million b/d compared with 7.7 million b/d for first-quarter 2018 and 8.17 million b/d for first-quarter 2017. Canada remains the largest source of US crude imports. The US’s crude imports from Canada so far this year have been 4% higher compared to with a year ago.
In this year’s first quarter, US crude oil imports from OPEC members averaged 1.7 million b/d compared with annual averages of 2.58 million b/d in 2018 and 3.1 million b/d in 2017. Amid the production cuts, many OPEC members reduced exports to the US in favor of rising markets in Asia.
The imports from Venezuela and Iraq have fallen the most. US sanctions directed at Venezuela’s energy sector have driven US imports from Venezuela to recent lows. US imported just 47,000 b/d of crude oil from Venezuela in this year’s first quarter compared with an average of 505,000 b/d during 2018. Preliminary weekly import values show the US didn’t import any crude oil from Venezuela in May.
In this year’s first quarter, US crude oil imports from Saudi Arabia and Iraq—the two largest sources of imports from OPEC in 2018—have averaged 26% and 28% below their 2018 average levels.
Meanwhile, US Gulf Coast imports of OPEC crude oil in March were below those for the West Coast region, marking the first time on record that the Gulf Coast region was not the predominant import area of OPEC crude oil in the US.
Rising US crude production and ongoing investment in pipelines and port capacity lead to surging US crude exports. Over this year’s first quarter, US crude oil exports rose to 2.75 million b/d, up from 1.53 million b/d a year ago. Canada remains the largest single destination for US crude oil exports, averaging 464,000 b/d in this year’s first quarter. Canada received 378,000 b/d of US crude oil exports in 2018, representing 19% of total US crude oil exports for the year. In this year’s first quarter, South Korea received the second-largest volumes of crude from the US, followed by the Netherlands, India, and the UK.
US crude oil exports to China fell as a result of the trade war. US exported 80,000 b/d to China in this year’s first quarter, down from 357,000 b/d in first-quarter 2018. In contrast, US crude exports to India surged to 266,000 b/d during first-quarter 2019, up from merely 33,000 b/d a year ago.
US exports of total petroleum products set a record high in 2018, reaching an annual average of 5.6 million b/d—an increase of 366,000 b/d from 2017 levels. However, lower refinery runs, and solid domestic demand are reducing petroleum product exports this year. OGJ forecasts that US exports of products will decline 8.7% this year to 5.1 million b/d. Distillate, propane, and motor gasoline remain the major export products.
In contrast, product imports year-to-date have been higher than a year ago, reflecting lower US refinery production. Motor gasoline imports over this year’s first 5 months have been 5.7% higher compared with a year ago, API data shows.
US oil inventories
As of midyear, estimated industry crude oil stocks stood at 473 million bbl, up from 415 million bbl a year ago. Industry crude stocks so far this year have remained above the same period a year ago and higher than their latest 5-year average. This accumulated stock build resulted from strong US crude oil production exceeding the growth in crude oil exports and domestic refinery demand.
The amount of crude oil in the SPR stood at 645 million bbl. Total product stocks at midyear were 837 million bbl, up from 792 million bbl from a year ago, as the increase in distillate inventories more than offset a decline in gasoline inventories.
US natural gas
Following a 10.5% increase last year, US gas consumption will continue to climb this year, albeit at a slower pace of 2.5%, or 2 bcfd, OGJ forecasts. The slower growth rate reflects reduced extreme weather frequency and a high 2018 consumption baseline.
In this year’s first quarter, US gas consumption averaged 102.74 bcfd, 5% higher than first-quarter 2018. Colder-than-expected temperatures in March raised consumption for space heating in the residential and commercial areas. Gas usage in electric power generation averaged 26.6 bcfd over the first quarter, 6.8% higher from a year ago. Gas consumption in the industrial sector also increased 2.5%.
For all of 2019, OGJ forecasts that much of the growth will come from the industrial sector, backed by new petrochemical plants under development. After a strong rebound of 15% in 2018, gas usage in power generation this year will rise 2%. The growth of combined gas consumption in the residential and commercial sectors will also slow down to 1% from last year’s 11%.
According to EIA, cooling degree-days in 2018 were 1,587, which is expected to come down to 1,380 this year. Heating degree-days will be largely flat this year compared with last year.
Growth of US gas production continues to be pronounced, supported by activities in Appalachia, the Permian, and in the Haynesville. These three regions now collectively account for 50% of total US gas production, helped by new drilling and completion techniques, including longer laterals that have increased well productivity. OGJ forecast that US marketed gas production will increase 9% to 97.7 bcfd this year.
Appalachia remains the largest gas-producing region in the US. Total production of the region has increased to 31.3 bcfd over this year’s first half, 16% higher than the same period a year ago, according to EIA’s drilling productivity report. The potential takeaway capacity in Appalachia is enormous, supporting higher levels of production growth.
Gas production in the Permian basin increased 2.7 bcfd, or 32%, in 2018. Over this year’s first half, gas production in the Permian averaged 13.85 bcfd, up 33% from the same period a year ago. Surging production makes takeaway capacity remain tight. Waha pricing has gone negative for 15% of the trading days so far this year. Flaring and venting of gas in the Permian basin has reached an all-time record high in this year’s first quarter, averaging 661 MMcfd, according to Rystad Energy (OGJ Online, June 4, 2019).
The coming online of Kinder Morgan’s Gulf Coast Express Pipeline later this year will relieve, to some extent, the congestion of the Permian. However, the congestion will likely stay until the coming online of the Permian Highway pipeline in 2020 and the finally sanctioned Whistler project in 2021.
Haynesville activity has been experiencing a strong resurgence since 2017, thanks to advanced completion designs. Production of the region increased by 2.2 bcfd, or 34%, in 2018. Over the first half of this year, production has increased 29% year-over-year.
Gas production in the federal Gulf of Mexico has been declining for nearly 2 decades. However, 18 new gas production fields starting in 2018 and 2019 may slow or reverse the long-term decline in the region.
OGJ forecasts that US net gas exports will average 4.6 bcfd in 2019, up from 1.9 bcfd in 2018, with most of the growth attributable to increases in LNG exports.
US LNG exports will increase to 4.8 bcfd this year, up from 3 bcfd last year. Total LNG export nameplate capacity reached 4.3 bcfd as of yearend 2018 and an additional 4 bcfd of liquefaction capacity is to come online over the course of this year, making the US the third-largest gas producer in the world behind Australia and Qatar.
For US LNG exports, most take-or-pay, long-term contracts have been signed with counterparties in Asia. According to EIA data, a total of 28 countries received LNG exports from the US during 2018. South Korea, the top destination, received 73 cargoes in all, followed by Mexico with 53, and Japan with 37.
Pipeline exports to Canada and Mexico also are increasing. The US will become a net exporter of gas by pipeline on an annual basis this year, OGJ forecasts.
US pipeline exports of gas to Mexico in 2018 averaged 5.2 bcfd, up from 4.2 bcfd in 2017. Much of the recent growth is attributed to increased US exports out of the Permian in West Texas as new pipelines were installed and as gas-fired electric power plant projects in Mexico entered service. Gas flows into Mexico should be poised to increase markedly during this year, as Sur de Texas pipeline comes online this year. The 2.6 bcfd Texas-to-Mexico pipeline has been delayed by more than a year due to technical issues and other problems.
Exports via pipeline to Canada have risen since November 2018, when the second phase of the Rover Pipeline and the Nexus Pipeline entered service. US gas exports to Canada were 3.3 bcfd in February—the highest on record.
Working gas inventories ended March at 1.2 tcf, 15% lower than levels a year earlier and 28% lower than the 5-year average, as gas inventories entered the 2018 winter heating season at the lowest level in more than a decade. Driven by increasing production, gas storage injections will outpace the previous 5-year average during the 2019 injection season and reach the 5-year average level by October.
Mild weather and record US gas production keep prices low despite low storage levels and high exports. OGJ expects Henry Hub gas spot prices will average $2.75/MMbtu this year, down from $3.15/MMbtu in 2018.