API Industry Outlook Fourth Quarter 2021 - R. Dean Foreman, Ph.D - American Petroleum Institute
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API Industry Outlook Fourth Quarter 2021 R. Dean Foreman, Ph.D. December 16, 2021
Third quarter 2021 by the numbers
Key points – Q4 2021 Benchmark price averages
Economy Brent crude oil: $73.47 per barrel WTI crude oil: $70.62 per barrel
NGL composite: $9.69 per mmBtu Natural gas (Henry Hub): $4.35 per mmBtu
Global and U.S. GDP consensus expectations for above-average growth to 2023
have persisted despite the pandemic, some slowing and high price inflation Quarterly increase
5-year range
U.S. petroleum Quarterly decrease
Uncertainties: pandemic, price inflation; U.S. dollar exchange value; debt
ceiling/debt financing demand
20.3 mb/d Revenues
Work force, supply chain, financial and energy policy issues have continued to $687 B
represent headwinds to oil and natural gas investment, drilling and production
Industry capital investment rose to $43 billion in Q3 2021; 4th lowest on record
Oil
U.S. refinery Net
Global oil demand near 100 million barrels per day (mb/d) in Q4 per EIA
throughput income
If the economy stays on track, 2022 global demand could outstrip supply 16.2 mb/d U.S. drilling
activity $38 B
without supply growth by OPEC+ (3.2 mb/d) and the U.S. (1.4 mb/d) per EIA 500 rigs
U.S. supply growth hinges on investment/drilling as well as leveraging the
inventory of drilled but uncompleted wells, which has diminished
Natural gas Capital
U.S. oil & gas
Global natural gas markets remained in disarray entering winter 2021, production expenditures
maximizing the pull for U.S. exports 33.4 mb/doe $43 B
With record-high well productivity, U.S. natural gas supply has remained ample • Financial compilation based on API 200 companies with
despite muted drilling activity shares listed on U.S. stock exchanges.
sources: EIA; API Monthly Statistical Report; Bloomberg and
company reports; Baker Hughes; API Team analysis
Key implications – Q4 2021 For consumers The demand for oil and natural gas has continued to grow with the economy, and price pressures have impacted consumer sentiment – and could persist if the economy remains on track For natural gas and oil industry producers Industry capital investment picked up in Q3 2021 but remained at historically weak levels Work force, supply chain, financial and policy uncertainties have muted the historical responsiveness of activity to higher prices – and raised potential cost escalation As the U.S. was a petroleum net importer for six of the past seven months, domestic prices have generally reflected import parity and weakened the advantages that accompanied abundant domestic supplies Blame has been misplaced on U.S. exports for raising prices; focus needs to be squarely on enabling investment, drilling, infrastructure For policymakers Abundant domestic production has historically helped keep downward price pressure, and cogent policies are needed to support it Those who believe most recent price inflation is temporary may misunderstand the time required for oil and natural gas investments Potential monetary, fiscal policy and energy policy instruments could have implications for delicate consumer finances
In Q3 2021, industry capital expenditures rose by 13.3% q/q in to $42.5
billion, but the backlog of U.S. projects under construction contracted
The industry invested $42.5 billion in Q3 2021, compared with $72.3 billion in the same quarter of 2019
Across the energy value chain, API is monitoring 94 oil & gas-related projects currently under construction worth $148 billion
Capital expenditures by industry segment $148 billion in current U.S. energy
Billion dollars (2021$)
infrastructure investments
150 Downstream and Petrochemcial
Equipment & Services
Midstream
Global integrated
148 billion
in estimated industry projects
125 Upstream 8 LNG
$59 B under construction (Nov. 2021,
down from $288 billion in Q4 2020)
100
75 21 22 Refinery 32
PetChem expansions Pipelines
50 $44 B $21 B $23 B
25 11
Facilities
(Terminals, sources: S&P Market Intelligence; Oil &
0 Storage) Gas Journal; American Chemistry Council;
API Team calculations as of Nob. 2021
2009 2012 2015 2018 2021 $157 M
* All other oil & gas industry companies
sources: Bloomberg; publicly-available company reports; BLS
Global drilling activity has lagged its levels in 2019 and its historical
responsiveness to prices
In Nov. 2021, global oil & gas drilling activity was down by 27.8% compared with Nov. 2019. Changes vs. 2019 by segment:
U.S. oil drilling (-32.7%) U.S. natural gas drilling (-21.4%)
International oil drilling (-22.9%) International natural gas drilling (-34.6%)
Global oil drilling activity and Brent crude oil prices, monthly
Rigs Dollars per barrel (2021$)
3,000 Real Brent crude oil futures prices 90
(12-months ahead, 3-mo. avg.) right axis
80
70
2,000 60
50
U.S. oil-directed rigs
40
1,000 30
International oil-directed rigs 20
International gas-directed rigs 10
0 U.S. gas-directed rigs 0
2015 2016 2017 2018 2019 2020 2021
sources: Baker Hughes ; Bloomberg; CME Group
Global Economy
What we’re watching now
Key themes this quarter are 1) precarious government debt situations 2) how supply chain bottlenecks could affect long-term wage
and inflation expectations; and 3) strong assumptions about prospective U.S. and OPEC+ supply growth
Fiscal Monitor Bottlenecks: causes and Oil Market Report, December 2021
• Debt is expected to remain persistently higher
than projected before the pandemic—almost macroeconomic implications • IEA projects demand growth of 3.3 mb/d in 2022
20% higher among advanced economies to 2026 • Bottlenecks in the supply of commodities,
– and could lead to increased government • Global oil production is poised to outpace
intermediate goods and freight transport began as
financing to cover both new and maturing debt demand from December, led by growth in the U.S.
pandemic-related supply disruptions amid strong
and OPEC+ countries.
demand from the global economic recovery. But
• Growth has resumed across all income groups, they have been aggravated by the attempts of
but in emerging markets and low-income • “The steady rise in supply combined with easing
supply chain participants to build buffers in already demand has considerably loosened our balances
developing countries GDP could remain at long- lean production networks – so-called bullwhip
lastingly lower levels than pre-pandemic for 1Q22.”
effects
projections, leading to lower fiscal revenues
• The direct inflationary effect of bottlenecks will
• With record-high debt, countries are exposed likely be limited after relative prices have adjusted.
to changes in global interest rates, refinancing However, sustained inflationary pressures could
risks and reduced fiscal space to respond to emerge if bottlenecks persist long enough to
future shocks trigger an upward shift in wage growth and International Energy Agency, Dec. 2021
• Debt service could be strained in emerging and inflation expectations
developing economies with shorter public debt
maturities and persistently low tax revenues
Rees, D. , Rungcharoenkitkul, P., Bank for International Settlements,
International Monetary Fund, Oct. 2021 Nov. 2021
Bloomberg consensus economic growth expectations have remained
historically strong despite higher price inflation
Consensus expectations are for above-average through 2023, with limited price inflation and monetary policy responses
U.S. oil and natural gas industry inputs across the value chain continued to outpace over the rate of broad price inflation
Global GDP outlook Consumer price inflation U.S. producer price inflation
y/y% y/y% Percent change (%)
Oct. 2021 vs. Oct. 2019
6 8
4.8 World 0 40 80 120 160
Average 4.2 Advanced economies
4 U.S.
2000-2020 3.2 NGL extraction 128.3
6 Emerging economies
2
Oil & gas extraction 111
0 4
Organisation for Economic Petroleum refining 47.6
-2
Cooperation and Development (OECD)
2 Natural gas
-4 Non-OECD 43.5
-3.6 distribution
-6 0 Chemical mfg. 18.9
2020 2021 2022 2023 2020 2021 2022 2023
sources: IMF; Bloomberg (Nov. 30) * Market exchange rate basis source: IMF; Bloomberg source: BLS
The IMF expects protracted high debt, deficits and debt service requirements
U.S. net debt has outpaced the advanced economies’ average, and IMF expects protracted government deficits
Even if a government has fiscal headroom and minimal re-financing risks, large financing needs to cover new and maturing debt
raise the possibility of having to withdraw fiscal support more quickly than expected
General government net debt Government fiscal balance 2021 gross financing need*
Percent of GDP Percent of GDP Percent of GDP
120 IMF projections 5 IMF projections 0 20 40 60 80
Japan
100
0 U.S.
80 Italy
-5 Spain
60 Canada
-10 France
40 U.K.
-15 U.S. World Singapore
20
U.S. World EM economies Oil producers Belgium
EM economies Adv. economies Adv. Economies Portugal
0 -20
2016 2018 2020 2022 2024 2026 2016 2018 2020 2022 2024 2026 *Gross financing need defined as projected overall deficit and
maturing government debt in 2021
source: IMF Fiscal Monitor (Oct. 2021)
U.S. economic growth has historically been driven by consumer spending that
has recently been hampered by weakened consumer sentiment
The Univ. of Michigan consumer sentiment index recently dropped to its lowest in a decade due to prices inflation concerns,
which has historically correlated with changes in consumer spending
Contributions to real U.S. growth, Q3 2014 to 2021 U.S. consumer sentiment and real spending growth
Index (2005=100) y/y%
200 20
U.S. domestic demand grew by $3.1 trillion between
2014 and 2021 , but was partially offset by $0.7 billion Consumer spending growth
15
increased net imports U. Mich. Consumer sentiment (2Q avg.)
150
10
5
Gross private 100
Consumer
investment 0
spending
Government -5
50
-10
0 -15
2005 2010 2015 2020
source: Bureau of Economic Analysis (BEA) sources: BEA; Univ. of Michigan Survey of ConsumersGlobal oil prices depend on many factors, but an inverse correlation with the
U.S. dollar has held for over 15 years
U.S. Brent crude oil prices and broad real dollar index, Jan. 2006- Nov. 2021
Dollars per barrel (2021$)
Jun. 2008
The U.S. dollar and global oil prices both 175
respond to global economic and financial
conditions 150
June 2008, just prior to the Great Financial 125
Crisis, marked the weakest broad U.S. dollar
exchange rate and highest oil price 100 Nov. 2021
With the COVID-19 pandemic, April 2020 75
reflected the opposite extreme of the strongest
U.S. dollar and lowest oil prices since 2006 50
As of Nov. 2021, the dollar depreciated by 6.6% 25 Apr. 2020
over the past 18 months, and increased oil Weaker U.S. dollar Stronger U.S. dollar
prices have broadly reflected tighter market 0
fundamentals 85 90 95 100 105 110 115 120 125 130
U.S. Federal Reserve broad dollar index (2006=100)
sources: Federal Reserve Board; Bloomberg; Bureau of Labor StatisticsOil Markets
Oil prices have historically related to many uncertain factors
CURRENT FACTORS FUTURE EXPECTATIONS
Supply / Demand Geopolitics
Seasonality
Demand growth
Inventories
MARKET PRICES
Supply growth
Capacity utilization Willing Buyers
& Willing Sellers Capacity growth
Value after refining
Current market level Logistics availability
and recent direction marine, pipelines
FINANCIAL MARKETS
interest rates, foreign exchange rates, equity marketsLed by emerging economies, global oil demand could near its record highs
by the end of 2022 per EIA
Global oil demand has historically changed in tandem with the economy, and this relationship remained intact through the 2020
COVID-19 recession
Global oil demand and GDP Global oil demand changes by region
Million barrels per day 2022 Million barrels per day
100 EIA estimates -10 -5 0 5 10
2021
2020 -8.5
90
2020 COVID-
19 recession
2021 +5.1
80 Great Financial
Crisis (2008-2009)
2000 EIA
estimates
2022 +3.6
70
40 50 60 70 80 90 100
Real GDP (Trillion 2010$) Non-OECD (Emerging economies)
*Market exchange rate basis
sources: EIA; Bloomberg; IMF; API Team calculations OECD (Developed economies)
source: EIA STEO (Dec. 2021)Global oil production could tie a world record 102.0 mb/d by Nov. 2022 per EIA
EIA projects the U.S. (+1.3 mb/d), OPEC (+2.3 mb/d) and Russia (+1.0 mb/d) will lead global production in 2022
EIA also projects Brazil (+0.3 mb/d), Central/S. Am. (+0.2 mb/d) and Canada (+0.3 mb/d) to grow
Global oil production EIA
Global oil supply changes by region
Million barrels per day estimates Million barrels per day
100 -10 -5 0 5 10
United States
75 -6.5
2020
OPEC
50
Russia & Caspian
2021 +1.8
25 EIA estimates
Other Non-OPEC
0 2022 +5.3
2000 2005 2010 2015 2020
OPEC Russia & Caspian Other Non-OPEC U.S.
source: EIA STEO (Dec. 2021)U.S. crude oil exports of about 3.0 mb/d are material to global supply
U.S. oil export growth helped to reduce global prices and represented about 12% of the world’s total petroleum exports in 2020
U.S. petroleum export growth and the fall of global oil prices
Million barrels per day U.S. share Million barrels per day Dollars per barrel (2021$)
75 2020: 12.0% 10 140
Brent crude oil prices
U.S. share 120
60 2010: 4.0% 8
U.S. crude oil 100
45 6 80
30 4 60
40
15 2 U.S. refined products
20
0 0 0
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
source: BP Statistical Review (2021) sources: EIA;API
Rest of World Africa
Middle East (ex Saudi Arabia) Russia & Caspian
Saudi Arabia U.S.EIA expects that global oil demand could continue to exceed supply
through early 2022 and support oil prices of $70 per barrel in 2022
EIA global supply/demand and Brent price estimates as of November 2021
Million barrels per day (mb/d) 2021$/Bbl
8 125
Supply less demand
EIA estimates
6 Brent crude oil prices
100
4 EIA Brent crude oil projections
2
75
0
50
-2
-4
25
-6
-8 0
2015 2016 2017 2018 2019 2020 2021 2022
sources: EIA STEO (Dec. 2021); CME Group; Bloomberg; Bureau of Labor StatisticsGasoline prices have historically reflected those of oil, which remained relatively
low since 2015 but recently climbed to their highest levels since 2014
EIA-reported refiner acquisition cost of crude oil prices versus U.S. average gasoline prices, adjusted for price inflation
Dollars per gallon (2021$)
6
Refiner acquisition cost of crude oil U.S. avg. gasoline price (all grades, U.S. city average retail price, EIA)
5
4
3
2
1
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
sources: Bloomberg; AAA; Bureau of Labor Statistics; API Team analysisIn 2022, U.S. liquid fuels consumption could exceed its 2019 levels per EIA
High-frequency indicators of transportation and industrial activity have continued to improve through Nov. 2021
EIA projects U.S. oil consumption growth of 3.9% (0.8 mb/d) to 20.4 mb/d in 2022, led by jet fuel, gasoline and other oils
Refined product key U.S. demand indicators, y/y% U.S. liquid fuel consumption by fuel
Million barrels per day
25 EIA
estimates
20
Jet fuel
15 Other (naphtha/gasoil; HGLs)
Residual fuel oil
DAT Spot 10 Distillates/diesel fuel
Apple Mobility Truck Posts Total Flights Plastics & Rubber Manufacturing
+42% +16% +26% +2% +5%
Nov. 2021 vs. Nov. 2020 Nov. 2021 vs. Nov. 2020 Nov. 2021 vs. Nov. 2020 Oct. 2021 vs. Oct. 2020 Oct. 2021 vs. Oct. 2020
5 Motor gasoline
0
2016 2017 2018 2019 2020 2021 2022
sources: Apple; DAT Trendlines; FlightRadar24; TSA; FRB sources: EIA; API MSRU.S. oil production has sustained strong levels despite historically low
drilling activity, and growth likely requires greater drilling activity
U.S. oil drilling in Q4 2021 remained more than 30% lower than its level at the same point in 2019; this and the inventory of
drilled but uncompleted wells has sustained but not grown oil production up to this point
U.S. oil drilling and production
Rigs Million barrels per day
2,500 EIA estimates 15
U.S. crude oil production
U.S. oil rig count
2,000 12
1,500 9
1,000 6
500 3
0 0
2010 2012 2014 2016 2018 2020 2022
sources: EIA; API; Baker HughesAs U.S. oil well productivity fell in Q4 2021 per EIA, and breakeven prices
as estimated by BTU Analytics were mixed among regions
EIA estimated oil well productivity fell in the Permian (-8% y/y), Bakken (-13% y/y) and DJ Niobrara (-20% y/y)
BTU Analytics’ estimated breakeven prices rose in three oil basins but generally remained below recent market prices
U.S. oil well productivity – new production per rig Oil estimated breakeven prices*
Million barrels per day oil-equivalent Dollars per barrel ($/Bbl.)
5 0 20 40 60 80 100
Bakken Permian Eagle Ford DJ Niobrara
Bakken Oct. 2021
4 Oct. 2020
Eagle Ford - West
3
Eagle Ford - East
2 WTI month-ahead
DJ Niobrara futures price
$70.02/Bbl.
1 Dec. 14, 2021
Permian ex DUCs Permian - Delaware
0 Permian - Midland
2016 2017 2018 2019 2020 2021
sources: EIA Drilling Productivity Report; Finley, M. (Oct. 2021) “U.S. Oil *Half cycle breakevens assuming 10% discount factor. sources: BTU Analytics; CME Group
Productivity Is Up But Will The Numbers Last?.” Rice Baker Institute.Drilled but uncompleted wells (DUCs) have contributed significantly to
Permian and other oil production, but relatively fewer remain
By contrast, natural gas drilling has not relied as heavily on DUCs, so relatively more drilling is required to achieve EIA’s outlook
Percent of 2021 oil and natural gas well completions Drilled by uncompleted wells, by basin
from DUCs, by basin Oct. 2021 ytd
Oil basins Dry gas basins
Bakken Wells Wells
24% 8,000 1,200
1,000
6,000
DJ Niobrara 800
33% 18%
39% 4,000 600
Anadarko Appalachia
400
Permian 2,000
36% Haynesville
200
4%
0 0
43% Oct. 2020 Oct. 2021 Oct. 2020 Oct. 2021
Eagle Ford Anadarko Bakken
Eagle Ford DJ Niobrara Haynesville Appalachia
Permian
source: EIA (Nov. 2021)Natural Gas
Historically strong global natural gas prices have spurred U.S. natural gas exports
Dutch
TTF
UK NBP
Japan
Henry Hub Korea
Marker As natural gas prices in Europe and Asia rose to unprecedented levels, U.S. natural gas
exports via liquefied natural, gas (LNG) and pipeline have achieved record levels
Global natural gas prices U.S. natural gas exports
$2021 per mmBtu, monthly Billion cubic feet per day
40 Asian Benchmark (JKM) Henry Hub 25 U.S pipeline natural gas exports U.S. LNG exports
UK Benchmark (NBP) Dutch Benchmark (TTF) EIA estimates
20
30
15
20
10
10
5
0 0
2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 2022
source: Bloomberg source: EIAEIA expects natural gas production to grow and support higher net exports
but lower domestic consumption in 2022
In 2022, EIA expects natural gas production growth of 3.9 bcf/d and 2.3 bcf/d higher net exports
3.3% less net electricity generation from natural gas year-to-date through November 2021, particularly across regions with
strong coal availability
Natural gas consumption and production by sector 2021 U.S. power sector gas consumption
November 2021 year-to-date, year-on-year changes
Billion cubic feet per day ISO-NE
EIA estimates +9.3%
120 Dry natural gas production ISO-NY
Northwest +11.0%
100
+4.2% SWP
Net Exports 10.9 13.6
80 -23.3%
MISO PJM
Electric 28.8 CAISO
30.7 -10.0% --0.4%
60 Power +8.7%
Southwest
40 27.6 28.6 -12.3% Southeast
Industrial
ERCOT -5.7%
20
Res / -4.3%
22.2 22.8
Comm
0 sources: EIA; FERC
2020 2021 2022
source: EIA (Dec. 2021)Natural gas-dedicated drilling has sustained historically low breakeven
prices and record well productivity
Estimated natural gas breakeven prices remained below recent natural gas futures prices
For dedicated dry gas drilling, producers achieved record rig productivity in Q4 2021 per EIA
Natural gas estimated breakeven prices Natural gas well productivity – production per rig
Dollars per million Btu (mmBtu)
0 1 2 3 4 5 6 Million cubic feet per day nat. gas-equivalent
35
Oct. 2021 Henry Hub futures price
Haynesville Oct. 2020 30
for delivery one month
ahead: $3.64 per mmBtu 25
Dec. 14, 2021 Appalachia
Appalachia - Northeast PA 20
15
Haynesville
Appalachia - Southwest PA 10
5
Appalachia - Ohio 0
2016 2017 2018 2019 2020 2021
source: EIA Drilling Productivity Report
*Half cycle breakevens assuming 10%
discount factor and play-specific costs
sources: BTU Analytics; CME GroupU.S. natural gas production could be challenged to grow unless drilling
activity accelerates from its historic lows
U.S. natural gas marketed production rose to 103.7 bcf/d in Q4 2021 and is expected by EIA to grow in 2022 despite
historically low drilling activity
U.S. natural gas drilling and production
Rigs Billion cubic feet per day
1,200 120
U.S. natural gas production EIA estimates
1,000 U.S. natural gas rig count 100
800 80
600 60
400 40
200 20
0 0
2010 2012 2014 2016 2018 2020 2022
sources: EIA; Baker HughesAPI economics resources available at www.api.org
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