Oil Natural Gas prices remain Low on news of large supplies
By Alex Mills
Texas Insider Report: AUSTIN Texas Crude oil production in the U.S. had been on a slide downhill for 40 years or more. Americas dependency on foreign oil has been a major issue in the energy debate for many many years. 
Then along came a Greek immigrant oilman from Houston named George Mitchell.
No one knows when the issue of America dependency on foreign oil first gained notoriety but it really hit home in the 1970s with the rise of the Organization of Petroleum Exporting Countries (OPEC) increases in crude oil and gasoline prices an exorbitant inflation rate and lines at gasoline stations.
George P. Mitchell believed he could get enough natural gas out of shale rock to make a profit.
Mitchell drilled hundreds of wells into the Barnett Shale just north of Fort Worth and as time passed he developed a slick water" process allowing natural gas to flow from the shale. News spread about his success and more wildcatters began experimenting. Some reasoned that if the process of drilling horizontally through the shale and then fracturing the rock worked for natural gas it might work for oil too.
In fact the process worked so well that crude oil production in the U.S. grew from a low of 4.988 million barrels of oil per day in 2005 to an historic high of 9.428 million barrels per day in 2014an 89 percent increase in just 9 years. This dramatic reversal of 35
years of declining production astonished the oil industry from Dubai to Moscow to Houston.
America passed Russia and Saudi Arabia in total petroleum production in 2014 and now produces more liquid fuels than any other country according to
the Energy Information Administration (EIA). The U.S. produced 14.021 million barrels per day of petroleum liquids compared to 11.624 million barrels per day in Saudi Arabia and 10.847 million barrels per day in Russia.
The U.S. is the worlds top natural gas producer too producing 25728 billion cubic feet per day compared to (second place) Russia at 20437 billion cubic feet per day.
This dramatic turnaround continues to have an enormous positive impact on the U.S. economy and national security.
Crude oil imports have declined from 60 percent of total consumption in 2005 to 24 percent in 2015. The U.S. is importing less oil than any time in the last 45 years.
Three months ago the ban on crude oil exports was lifted and today crude oil from the U.S. is being exported everywhere.
With American stockpiles at unprecedented levels oil tankers laden with U.S. crude have docked in or are heading to countries including France Germany the Netherlands Israel China and Panama. The U.S. is also slated to be one of Japans top ten crude oil suppliers in May. Oil traders said other destinations are likely just as supplies in Europe and the Mediterranean region are also increasing.
The INEOS Intrepid the worlds largest multi gas carrier recently arrived in Norway carrying ethane derived from U.S. shale gas. This is the first time that ethane from U.S. shale gas has ever been shipped to Europe and the shipment represents the culmination of a $2 billion investment by INEOS.
INEOS intends to eventually use eight of these huge ships to provide a virtual pipeline shipping U.S. shale gas to its two petrochemical sites in Norway and Scotland as American natural gas replaces the reducing gas feed from the North Sea.
Can it continue?
The technological advancements made in drilling horizontal wells and in hydraulic fracturing keep improving every day. The EIA estimates that average shale well drilling costs have decreased 25-30 since 2012; the ingenuity of the U.S. oil and gas industry has made energy more affordable for consumers around the globe.
Oil Natural Gas Prices Remain Low On News Of Large Supplies
While the big news last week pointed to another historic increase in crude oil supplies natural gas received news that it is now the
major energy source for electricity generation in the U.S. The abundant supply of oil and natural gas in the U.S. continues to keep prices low.
The Energy Information Administration reported March 23 crude stocks in the U.S. rose by 9.4 million barrels to a record total of 532.5 million barrels.
The news of increased oil supplies caused oil futures for May delivery on the NYMEX to close down $1.66 (4) to settle at $39.79 per barrel on March 23.
The decline in price reversed a two-month rally from a low of $26 per barrel to a high of $41 earlier in the week.
On the other hand there were reports that oil supplies in a major trading area declined and there was a decrease in gasoline supplies. EIA reported that gasoline stocks fell 4.6 million barrels and demand for gasoline over the past four weeks rose 7 percent year-on-year. Also crude stockpiles at the Cushing Oklahoma delivery hub fell 1.3 million barrels declining for the first time in seven weeks.
Another event impacting oil prices is the anticipated meeting of oil exporting countries next month in an effort to limit more production. Qatar has invited all 13 OPEC members to Doha on April 17th for another round of talks to widen the production deal. Libya and Iran have snubbed the initiative arguing that they will need to boost their crude output further before considering joining any caps on production. Irans oil production has been reported at about 300000 barrels per day currently with expectations to increase.
Increased hedging volume is evident in Commodities Futures Trading Commission (CFTC) data as well as anecdotal evidence from commodities trading desk and its not confined to distressed producers according to a report from Morgan Stanley. IG Permian producers are actively willing to hedge at $45- 50 in 2017 which should cap the potential upside in prices" the report stated. Hedging is a financial tool that can be used to reduce risk associated with volatile price swings.
Regarding natural gas EIA expects that the combination of market forces and government policies will continue to stimulate the use of natural gas to provide 33 percent of generation in 2016 while coals share falls to 32 percent. The expected share of nonhydro renewables (wind and solar) increases to 8 percent in 2016 with hydropowers share at 6 percent.
Coal and natural gas generation shares over the past decade have been responsive to changes in relation to fuel prices. For example particularly low natural gas prices throughout much of 2012 following an extremely mild 201112 winter led to a significant rise in the natural gas generation share between 2011 and 2012 often displacing coal-fired generation. With higher natural gas prices in
2013 and 2014 coal regained some of its generation share. However with a return to lower natural gas prices in 2015 favoring increased natural gas-fired generation coals generation share dropped again EIA stated.
Environmental regulations affecting power plants have played a role in driving coals declining generation share over the past decade although plant owners in some states have made investments to shift generation toward natural gas at least partly for environmental reasons.
Environmental regulations may play a larger role in conjunction with market forces. Owners of some coal plants will face decisions to either retire units or reduce their utilization rate to comply with requirements to reduce carbon dioxide emissions from existing fossil fuel-fired power plants under the Clean Power Plan which is scheduled to take effect in 2022 but has recently been stayed by the Supreme Court pending the outcome of ongoing litigation.
Beyond the growing market share for natural gas-fired generation over the past decade coals generation share has also been reduced by the growing market share of wind and solar. Unlike the growth of natural gas-fired generation which has largely been
market-driven increased use of wind and solar has largely been driven by a combination of state and federal policies.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely those of the author.
