Texas Freeze Highlights Energy Paradox
(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.)
Traditionally, Rigzone’s news coverage has infrequently covered the electric power industry – save for its reliance on natural gas feedstocks. Recent freeze-related outages at oil and gas wells, refineries, gas stations, and other facilities in Texas, however, have put Rigzone in the unusual position of running a significant number of articles about the power industry.
A major player in Texas’ electricity sector that has received much public scrutiny in the wake of the widespread outages has been the Electric Reliability Council of Texas (ERCOT). ERCOT manages most of the state’s power flow and ordered rolling blackouts during the Arctic blast. Texas’ recent energy travails illustrate independence and – paradoxically – interdependence, according to one of Rigzone’s regular oil and gas market watchers. Keep reading for his explanation, along with insights on other recent market developments.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Phil Kangas, US Partner-in-Charge, Energy Advisor, Natural Resources and Mining, Grant Thornton LLP: Much has been written about the relative benefits and risks of having ERCOT effectively isolated as a stand-alone utility, disconnected from the rest of the U.S. electrical grid. State utility service connectivity notwithstanding, what is clear is just how indelibly tied the U.S. and world energy economies are to the Lone Star State.
As expected, Texas production and refinery disruptions sent a wave of increased gasoline and natural gas prices across the U.S. The American Automobile Association (AAA) reported that gas prices last week surged to their highest levels since the fall of 2019, with two-thirds of state averages jumping double-digits after the Texas storms. Texas accounts for about a quarter of the U.S. total natural gas production, which dropped by more than half during the February storm event, driving up heating bills.
Energy markets worldwide also felt the effects of the Texas storms. When Gov. Greg Abbott banned the exports of natural gas for several days, several million people in the northern Mexican states went without power. Further afield, crude markets in Europe and Asia rallied as traders reacted to lost capacity from the Permian. Analysts estimated the millions of barrels per day production drop represented two to four percent of global supply. Commodity traders responded by bidding up North Sea and Middle Eastern crude at premium prices, resulting in dramatic increases. OPEC members voiced active consideration of resetting supply side restrictions to offset lost U.S. shale output.
Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: The week started with Michigan declaring a state of emergency due to lack of propane. This is in stark contrast with Michigan lawmakers aiming to eventually shut down (the Enbridge pipeline) Line 5, which supplies most of the propane to the state and would make things even more dire in future winters.
Rigzone: What were some market surprises?
Le Dain: With everyone recovering from the Texas freeze and reviewing the data, it is clear that natural gas had the largest percentage increase in contribution to the grid during the week – and this was clear in the record storage withdrawal.
Kangas: The magnitude of optimism for commodities prognosticators is somewhat a surprise. Supply and demand factors continue to collude in pushing up the price of oil. This week Goldman Sachs Commodities Research substantially increased its Brent crude oil price forecasts for the second and third quarters this year, up to $70 per barrel from $60 per barrel, and to $75 per barrel from $65 per barrel, respectively. Supply restrictions from OPEC had already curtained inventories, made even more impactful from production hits in the Permian due to this month’s cold snap. Forecasters cite increasingly widespread vaccinations and warmer summer months for their bullish sentiments, both of which portend a return to more normal consumption activities.
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