Dailion’s regular energy prognosticators look at holiday weekend driving demand, fuel price reduction efforts, the natural gas market, and more in this week’s preview of what to watch in oil and gas markets. To learn more about the details, keep reading.
Dailion: This week, what developments/trends will you be watching for?
Hillary Stevenson, Director of Industry Relations for Validere, an oil and gas data company: I’ll be watching to see how the holiday weekend’s driving demand turns out. With many Americans intending to hit the road for vacation travel, Memorial Day weekend is the unofficial start of driving season. This anticipated increase in demand occurs at a time when gasoline and diesel prices are at all-time highs. Memorial Day weekend is the last weekend before the June 1 implementation of summer grade gasoline specifications, which demand higher expensive gasoline to reduce smog formation. The White House is contemplating two options for lowering fuel prices: releasing diesel from the Northeast Home Heating Oil Reserve and allowing summer-grade gasoline to be marketed. Diesel emissions would almost certainly have a negligible and short-term influence. The last time the reserve was used was during Winter Storm Sandy. Reducing the vapor pressure specification for gasoline in the summer could avert a $0.03-0.10/gal price increase but at the cost of increased air pollution.
Riley Advisory Services’ Managing Director, Jon Donnel: As we approach the summer cooling season, storage levels are around 15% below the five-year average, and the Henry Hub natural gas contract hit $9.00 last week. Although there was a considerable commotion around the front-month contract’s mid-week expiration, these are the highest prices we’ve seen since 2008. Russian gas delivery difficulties and sanctions are disrupting the supply chain, forcing other volumes into non-traditional markets. LNG shipments from the United States are nearing 10 billion cubic feet per day, roughly treble the volume exported in 2018. Given the increased demand created by Russia’s supply problems, it will be fascinating to watch if environmental and permitting restrictions for new pipelines and LNG export terminal projects are eased. Furthermore, increased natural gas prices and concern about long-term supply may encourage more buyers to sign long-term offtake agreements, which are critical for moving large projects forward to the FID stage.
It will also be interesting to see how the US supply responds. Companies have been careful in deploying capital and typically sticking to earlier budgets, so activity levels and overall production have remained measured year-to-date. Last week, the number of gas-directed rigs reached 150, up almost 40% from the end of last year but still significantly below the 2019 and 2020 averages (about 170 and 190, respectively) when natural gas prices were around $3.00/mcf. Costs for oilfield services are rising (especially for OCTG, drilling rigs, and completion services), and manpower shortages are limiting the industry’s capacity to ramp up operations swiftly if needed. However, at current strip prices, the projected returns on new projects are very appealing, and companies that can solve supply chain concerns stand to win.
Tom Seng, Director of the University of Tulsa’s Collins College of Business’s School of Energy Economics, Policy, and Commerce: The current crude and natural gas rallies show no signs of slowing down anytime soon. The AAA data on miles driven in the United States over Memorial Day Weekend will be highly telling about how the summer will play out.