|ENTERPRISE PRODUCTS PARTNERS L P filed this Form 10-K on 02/28/2018|
In response to the growing supplies, beginning in November 2014, the Organization of Petroleum Exporting Countries (“OPEC”), opted to defend its market share by maintaining (and in some cases increasing) its crude oil production levels rather than their previous practice of cutting production to balance global markets. The result was bloated global inventories of crude oil and products and a dramatic decline in global crude oil prices from an average of $93 per barrel in 2014, to $49 per barrel in 2015 and further to $43 per barrel in 2016, as measured by the price of West Texas Intermediate (“WTI”). Prices reached a low of approximately $26 per barrel in February 2016. In September 2016, as a result of continued negative market sentiment on crude oil prices, OPEC members began discussing an output “freeze” to try to balance global markets and reduce excess crude oil inventories. In November 2016, OPEC members formally agreed to production cuts, starting January 1, 2017, that have significantly reduced the global crude oil supply overhang. As of the end of November 2017, oil stocks in the 35 member countries comprising the Organisation for Economic Co-Operation and Development (or “OECD”) decreased by an aggregate 35 million barrels (or 3%) when compared to data from the end of 2016. Likewise, total refined products stocks in OECD countries decreased by 62 million (or 4%) when compared to data from year-end 2016.
OPEC members met again in December 2017 and agreed to extend the freeze into 2018, and are expected to meet again in the summer of 2018 to review market conditions and the impact of the freeze on global balances. In addition to OPEC members, certain non-OPEC producers including Russia have agreed to participate in the production cuts, which has further strengthened crude oil and related energy commodity prices. As a general rule, there has been a high level of compliance with the OPEC production quotas and global inventories of crude oil and related products have fallen significantly. In addition to the OPEC-led production cuts, most industry experts expect that strong consumer demand for energy and related products due to the lower prices (combined with routine supply disruptions) will accelerate rebalancing of the global oil market, with daily demand exceeding supply as early as the second half of 2018. With the announced cuts and positive supply and demand trends, industry experts estimate that WTI prices will average $50 to $60 per barrel between now and 2020.
Likewise, natural gas prices have also experienced significant weakness in recent years as a result of excess domestic supplies and warmer than average winters. As measured by the NYMEX at Henry Hub, natural gas prices averaged $4.26 per MMBtu in 2014, $2.63 per MMBtu in 2015, $2.55 per MMBtu in 2016 and $3.02 per MMBtu in 2017. For the start of 2018, natural gas prices at Henry Hub averaged $3.00 per MMBtu through mid-February 2018.
In response to lower energy commodity prices, domestic producers significantly reduced both their drilling and completion activities in most production basins starting in early 2015. As a result of reduced drilling, domestic crude oil production at the end of 2016 was 840 MBPD lower than its previous peak in June 2015; however, with improved prices in 2017 and significant technical and efficiency gains, production of crude oil, NGLs and natural gas has been steadily increasing and, in fact, is at record production levels. As a result of higher energy commodity prices in 2017 and continued positive sentiment towards price stability, we expect an increase in producer investment and drilling and well completion activities during 2018 in and around our assets in the Permian, Eagle Ford, Haynesville and Rockies regions. Furthermore, we expect that our assets in these areas will be very competitive in supplying services for the resulting new production. We also believe that basins located closest to prime markets on the U.S. Gulf Coast will be preferred by producers due to more favorable economics as compared to other more distant areas (mostly due to lower transportation costs).
Supply Side Observations
During 2017, we saw a continuation of the upstream industry’s shift to shale resource basins, away from long lead-time projects. Even the major oil companies shifted their investments towards the shale plays. We believe that because projects in U.S. shale resource basins exhibit a low risk, short lead time production profile, the U.S. shale resources will continue to play an increasing role in both domestic and global markets. Many energy economists also believe that outside of some limited excess production capacity within OPEC, U.S. shale production is now the world’s swing crude oil supply.