Easwaran Kanason

Co - founder of NrgEdge
Last Updated: June 12, 2018
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Business Trends
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The magic number seems to be 1 million barrels. At least, that is what has been requested by the US to Saudi Arabia and some other OPEC producers in an unofficial appeal. After President Donald Trump publicly complained on Twitter that ‘OPEC is at it again!’ when US crude prices surged to their highest levels in three years – induced in no small part by the re-imposition of sanctions on Iran – the request strikes a more conciliatory note as the oil titans of the world seek to bring some order to the market.

It is not known how the request was made, but it is known that it was made individually to a select group of oil producers – likely Saudi Arabia and its closest OPEC allies Kuwait, the UAE and Algeria, and most definitely not Iran. News of the request raised eyebrows. The US tends to shy away from involvement or engagement with OPEC, and that this happened an unprecedented situation. The USA is less worried about surging shale production in response to higher prices, but something more short-term – retail gasoline prices have jumped to their highest levels in more than three years, and with the summer driving season coming, the US fears high pump prices will trigger dissatisfaction, particularly with mid-term elections coming in November. Requesting the American shale industry to restrict output goes against US policy, so it has to go to OPEC, cap in hand, to ask for help.

Can OPEC help? Will OPEC help? The answer is very likely to be a yes. Between Saudi Arabia, Kuwait and the UAE alone, there is almost 2 mmb/d of spare capacity that could theoretically be activated quickly. Those three – along with Algeria and non-OPEC member Oman – reportedly met up prior to the US request to their position in raising output. Russia too has significant spare capacity – some 500,000 b/d – that Rosneft is said to be gearing up to utilise. It is not known whether the US request included one to Russia, but OPEC and Russia were always going to head into the June 22 meeting in Vienna with the target of raising output regardless of America. The past three weeks has been characterised by a united Saudi-Russia front aimed to marshalling support for an output increase to convince other members of the OPEC-NOPEC alliance to fall in line.

From its ‘the higher the better’ attitude seen earlier this year, OPEC has now moved to a desire to contain prices within the US$70-75/b range. To do that, it has publicly stated that it will move to replace any volumes lost from Iran and Venezuela. No numbers have officially stated, but 1 million barrels per day was always seen as a significant enough figure by analysts worldwide. And now, it seems, the US believes that is the magic number as well. OPEC meets in two weeks and I believe it is very likely that they too will agree. 


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January, 21 2021
EIA forecasts less power generation from natural gas as a result of rising fuel costs

In its latest Short-Term Energy Outlook (STEO), released on January 12, the U.S. Energy Information Administration (EIA) forecasts that generation from natural gas-fired power plants in the U.S. electric power sector will decline by about 8% in 2021. This decline would be the first annual decline in natural gas-fired generation since 2017. Forecast generation from coal-fired power plants will increase by 14% in 2021, after declining by 20% in 2020. EIA forecasts that generation from nonhydropower renewable energy sources, such as solar and wind, will grow by 18% in 2021—the fastest annual growth rate since 2010.

The shift from coal to natural gas marked a significant change in the energy sources used to generate electricity in the United States in the past decade. This shift was driven primarily by the sustained low natural gas price. In 2020, natural gas prices were the lowest in decades: the nominal price of natural gas delivered to electric generators averaged $2.37 per million British thermal units (Btu). For 2021, EIA forecasts the average nominal price of natural gas for power generation will rise by 41% to an average of $3.35 per million Btu, about where it was in 2017. In contrast, EIA expects nominal coal prices will rise just 6% in 2021.

The large expected rise in natural gas prices is the primary driver in EIA’s forecast that less electricity will be generated from natural gas and more electricity will come from coal-fired power plants in 2021 than in recent years. EIA expects about 36% of total U.S. electricity generation in 2021 will be fueled by natural gas, down from 39% in 2020. The forecast coal-fired generation share in 2021 rises to 22% from 20% last year. However, these forecast generation shares are still different from 2017, when natural gas and coal each fueled 31% of total U.S. electricity generation.

Significant growth in electricity-generating capacity from renewable energy sources in 2021 is also likely to affect the mix of fuels used for power generation. Power developers are scheduled to add 15.4 gigawatts (GW) of new utility-scale solar capacity this year, which would be a record high. An additional 12.2 GW of wind capacity is scheduled to come online in 2021, following 21 GW of wind capacity that was added last year. Much of this new renewable generating capacity will be located in areas that have relied on natural gas as a primary fuel for power generation in recent years, such as in Texas.

January, 20 2021
U.S. oil and natural gas production to fall in 2021, then rise in 2022

U.S. monthly crude oil and natural gas production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)

In its January 2020 Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts that annual U.S. crude oil production will average 11.1 million b/d in 2021, down 0.2 million b/d from 2020 as result of a decline in drilling activity related to low oil prices. A production decline in 2021 would mark the second consecutive year of production declines. Responses to the COVID-19 pandemic led to supply and demand disruptions. EIA expects crude oil production to increase in 2022 by 0.4 million b/d because of increased drilling as prices remain at or near $50 per barrel (b).

The United States set annual natural gas production records in 2018 and 2019, largely because of increased drilling in shale and tight oil formations. The increase in production led to higher volumes of natural gas in storage and a decrease in natural gas prices. In 2020, marketed natural gas production fell by 2% from 2019 levels amid responses to COVID-19. EIA estimates that annual U.S. marketed natural gas production will decline another 2% to average 95.9 billion cubic feet per day (Bcf/d) in 2021. The fall in production will reverse in 2022, when EIA estimates that natural gas production will rise by 2% to 97.6 Bcf/d.

U.S. monthly crude oil production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)

EIA’s forecast for crude oil production is separated into three regions: the Lower 48 states excluding the Federal Gulf of Mexico (GOM) (81% of 2019 crude oil production), the GOM (15%), and Alaska (4%). EIA expects crude oil production in the U.S. Lower 48 states to decline through the first quarter of 2021 and then increase through the rest of the forecast period. As more new wells come online later in 2021, new well production will exceed the decline in legacy wells, driving the increase in overall crude oil production after the first quarter of 2021.

Associated natural gas production from oil-directed wells in the Permian Basin will fall because of lower West Texas Intermediate crude oil prices and reduced drilling activity in the first quarter of 2021. Natural gas production from dry regions such as Appalachia depends on the Henry Hub price. EIA forecasts the Henry Hub price will increase from $2.00 per million British thermal units (MMBtu) in 2020 to $3.01/MMBtu in 2021 and to $3.27/MMBtu in 2022, which will likely prompt an increase in Appalachia's natural gas production. However, natural gas production in Appalachia may be limited by pipeline constraints in 2021 if the Mountain Valley Pipeline (MVP) is delayed. The MVP is scheduled to enter service in late 2021, delivering natural gas from producing regions in northwestern West Virginia to southern Virginia. Natural gas takeaway capacity in the region is quickly filling up since the Atlantic Coast Pipeline was canceled in mid-2020.

January, 15 2021