Demand Rebound Eludes Some Oil Players in Permian Basin

Demand Rebound Eludes Some Oil Players in Permian Basin
Rigzone reviews some oil and gas market hits and misses for the week ending April 23, 2021.

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)

Although the oil demand outlook in the United States and elsewhere has been improving, market conditions have not gotten better for some key players in the Permian Basin. So says one of Rigzone’s regular oil and gas market-watchers. Find out which segment is still waiting for a recovery, along with other insights, in this installment of oil and gas market hits and misses.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Phil Kangas, U.S. Partner-in-Charge, Energy Advisor, Natural Resources and Mining, Grant Thornton LLP: As expected, broad vaccination rollouts have increased travel and economic activity, driving up demand for oil. Earlier this week, Rystad Energy released its latest forecast showing a 6% year on year increase in oil demand for 2021. Jet fuel, hit hardest by the pandemic’s effect on air travel, is expected to improve with a 21% recovery. Rig counts continue to tick up in response, as Baker Hughes (NYSE: BKR) reported an additional seven units coming online last week, continuing the upward growth trend.

Pipeline infrastructure continues to be overbuilt relative to demand. Permian-based oil pipelines are operating vastly below capacity. The surge in construction through 2018-9 was built in an environment of ever-increasing production to meet demand, at a time when U.S. crude production hit a record 13 million barrels per day (bpd). The pandemic changed that, and while production has returned to about 11 million bpd, many of the additional pipelines built over the past two years are just now coming online and sit empty or underutilized. This additional capacity has outstripped the need, forcing operators to seek alternative uses for pipeline assets and impacting operators’ fiscal bottom lines.

Rigzone: What were some market surprises?

Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: Increased climate action was pledged by the U.S. and Canada this week, with a target of reducing emissions by 50% against historical baselines. This was to be expected, but the surprise is likely the number of energy executives – particularly at large caps – that are in many ways supportive of the plan, and have increasingly backed climate action the last few weeks. There are likely a few economic reasons for this, beyond the social, as natural gas replacing remaining coal generation is still a massive prize for both environmentalists and U.S. energy producers. Increased regulation in other large industries (up to a point) has also typically allowed large incumbents to achieve higher returns as the costs to comply become prohibitive for new entrants as well as smaller peers. Likely why it’s often the larger names backing parts of these programs in the U.S. and Canada. 

Kangas: What a difference a year makes. A year ago, this week marked WTI closing at an unprecedented -$37.63 a barrel, as the pandemic raged and a price war between Saudi Arabia and Russia flooded the market with oil. No one would have expected the $100+ variance a year later, but WTI surged above $64 this week as demand forecasts continue to improve and OPEC+ has taken measures to control global supply. Fluctuations will continue, but even some trading companies are now predicting prices will surpass $70 this year.

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