The New Crisis Threatening America’s Energy Sector

Matthew Carr By Matthew Carr
Emerging Trends Strategist, The Oxford Club

Oil & Gas

It’ll be a record year for U.S. crude.

The Energy Information Administration (EIA) expects American oil production to average 10.7 million barrels per day (bpd).

We’re already the world’s top oil-producing country.

And over the next five years, the U.S. crude output should increase another 3.7 million bpd.

The lion’s share of that growth – more than 70% – will flow from the Permian and Eagle Ford basins in Texas.

In fact, oil output from West and South Texas is expected to double by 2023.

Now, that should come as no surprise. As energy investors, we know the Permian Basin as America’s great shale oil play.

And we’ve watched oil production from the Permian explode more than 275% higher in recent years…

In March, Permian output neared 3.1 million bpd. That’s essentially a third of total U.S. production, as well as almost half of U.S. shale oil output.

There is simply no play as valuable as the Permian.

But what often gets overlooked is natural gas. U.S. natural gas output is also at a record high…

Besides being the biggest oil gusher in the country, the Permian is also second-largest natural gas producer behind the Appalachia and its Marcellus and Utica plays.

As Permian oil production has surged, its natural gas production has skyrocketed right with it.

In fact, by some estimates, a third of what’s coming out of Permian wells right now is natural gas.

And this is creating a serious and costly problem.

This natural gas is now trapped and pooling.

The explosive growth of the Permian has been restrained by insufficient infrastructure. That’s now coming to a head as the immense supply of natural gas can’t be moved to the hubs on the Gulf Coast.

It’s a problem that’s getting worse every day.

As more wells are drilled and more oil is produced, more natural gas continues to flow. Permian natural gas production is clocking in at new records. Meaning the glut is getting bigger and bigger.

Already, the price for Permian natural gas is down more than 30% over the past year.

It earns the unwanted distinction as the cheapest in the country.

For the most part, it’s now basically a byproduct of oil drilling.

Adding even more pressure to prices is the reality that we have the seasonal collapse in U.S. natural gas. Spring is here and, despite the recent East Coast freeze, that typically means warmer weather. So demand for natural gas falls.

For 2018, Tudor, Pickering, Holt & Co. believes Permian natural gas will average $1.85 per million British thermal units (MMBtu).

By comparison, prices at the Henry Hub are currently $2.63 per MMBtu.

So Permian natural gas is trading at a nearly 30% discount to the U.S. benchmark. Some analysts believe that on some days in 2018, Permian natural gas will fall to $0… and may even turn negative.

America’s No. 1 oil field is now the worst market for natural gas.

And there are murmurs that some exploration and production companies are being pressured to cut back on oil output just to curtail natural gas production.

As with any glut, there are plans to relieve the pressure. We’ve covered here plenty of times that countries all over the world are hungry for U.S. crude and natural gas.

But plans and reality are two different things.

Companies like Sempra Energy (NYSE: SRE) and TransCanada Corporation (NYSE: TRP) are trying to build new pipelines, especially to Mexico. But they have faced roadblocks.

And if all planned projects actually happen, nameplate capacity out of the Permian would double by 2020.

The bigger problem is that the Permian could also be looking down the barrel of an oil pipeline shortage as well.

In fact, the International Energy Agency believes takeaway pipeline capacity from the Permian and the Eagle Ford will fall short by this summer. And West Texas producers are staring at a pipeline deficit of 290,000 bpd by the first half of 2019.

The Permian and the U.S. are facing two different records with two different outcomes in the near term. The natural gas glut in West Texas is going to only get worse. And prices are going to tumble even lower… even hitting zero on some days.

Investment in infrastructure isn’t just a campaign stump speech or a promise. It’s a necessity. Especially if America is to thrive.

Good investing,

Matthew