Oil Market Update

Mine YücelSenior Vice President and Research Advisor

Federal Reserve Bank of Dallas

September 27, 2019

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.

1

Energy Market Overview

• Geopolitical risks have risen considerably• Market was relatively balanced before the attack on Saudi

oil facilities• WTI around $57 despite the attack, OPEC+ cuts and

significant production declines in Iran and Venezuela • Slower global economic growth dampening oil demand• US oil production flattening as rig count sputters• New Mexico oil output near record highs• U.S. natural gas output still going strong• Energy trade important for U.S.

2

Disruption in Saudi productionNot much impact on U.S. imports

SOURCE:EIA,Oil Daily

6.352%

3.328%

2.420%

Disruption in Saudi Oil Supply (MB/D)

Additional Capacity Recovered Disrupted

0.68%

3.854%0.5

8%

1.014%

1.217%

US Crude Oil Imports (MB/D)

Saudi Arabia Canada Mexico

OPEC excl SA Other

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WTI Prices

0

20

40

60

80

100

120

14 15 16 17 18 19

$/Barrel

$63.10

NOTE:Prices are average of daily figures for week ending on 9/13/19. Square red mark represent closing price on 9/16, the blue square mark represents closing price on 9/25.SOURCE:EIA;Chicago Mercantile Exchange;Bloomberg

$56.19$57.29

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Balanced market in 2019

1.1

0.1

1.3

0.50.2

0.3 0.4

1.3

0.5

1.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Million Barrels Per Day, Change in Annual Average

Increases in Iraq, Libya, and Nigeria

Supply IncreaseSupply DecreaseDemandBalance

Involuntary cut

Source: Federal Reserve Bank of Dallas; International Energy Agency

Voluntary cut

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Undersupply in 2019 if Saudi outage longer

1.1

-0.7

1.30.5

0.20.3 1.2

1.3

0.5 1.1

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Million Barrels Per Day, Change in Annual Average

Increases in Iraq, Libya, and Nigeria

Supply IncreaseSupply DecreaseDemandBalance

Involuntary cut

NOTE: Saudi production assumed at 7.3 mb/d through Dec-19; Genscape (9/23) reported 3.3 out of 5.7 mb/d disrupted production is back. Source: Federal Reserve Bank of Dallas; Genscape; International Energy Agency 6

Market slightly oversupplied in 2020

0.10.6

1.0

0.3

0.4

0.30.2

0.10.3

0.2

1.3

0.0

0.5

1.0

1.5

2.0

2.5

Million Barrels Per Day, Change in Annual AverageSupply IncreaseSupply DecreaseDemandBalance

Assuming OPEC extends cut through end of 2020

Source: Federal Reserve Bank of Dallas; International Energy Agency 7

U.S. oil production growth slowing

SOURCES: Baker Hughes; EIA

100

300

500

700

900

1,100

1,300

1,500

1,700

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

13.5

2009 2011 2013 2015 2017 2019 2021

MB/D Rig count

U.S. crude oil production

U.S. oil rig count

719(Sep 20)

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Crude Oil Production by State

Note: Data shown are monthly for June 2019.Source: EIA

9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20

Lower 48 Shale Lower 48 nonshale Gulf of Mexico Alaska

Shale eclipses other U.S. production

NOTES: Shale production estimate is from the EIA, based on Drillinginfo data. Lower 48 excludes Alaska and federal offshore areas. Alaska excludes federal offshore production.SOURCES: EIA; Drillinginfo

MB/D

10

Permian most prolific shale basin

SOURCE: EIA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

PermianBasinEagle Ford

Bakken

Niobrara

Total oil production, MB/D

11

0

100

200

300

400

500

600

700

800

900

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57

2014

2015

2016

2017

2018

2019

Months

Permian BasinBarrels per day

Higher initial production driven by longer laterals

5238

6093

6752

7774

87489059

4000

5000

6000

7000

8000

9000

10000

2014 2015 2016 2017 2018 2019*

Horizontal feet per well

Note: * is year to dateSource: WellDatabase, Federal Reserve Bank of Dallas.

12

Government, tourism, energy and health dominate New Mexico’s economy

13

Mining and construction fastest growing

14

1.2

-1.0

1.8

-0.3

1.3

4.0

1.50.6 0.0

15.2

2.64.2

0.4

-0.8

3.1 2.7

12.3

5.7

2.8

5.3

-4

0

4

8

12

16

Total Gov't.(22.2%)

Educ. &HealthServ.

(16.4%)

Trade,Trans., &

Util.(15.8%)

Prof. &Bus. Serv.(12.7%)

Leis. &Hosp.

(11.9%)

Constr.(5.9%)

FIRE(4.1%)

Mfg.(3.2%)

Mining &Logging(3.1%)

Job growth (percent)

2018

2019 YTD

Note: 2019 data YTD December 2018 through August 2019Source: Bureau of Labor Statistics

New Mexico oil production hitting highs

15Sources: Baker Hughes; U.S. Department of Energy.

0

100

200

300

400

500

600

700

800

900

1,000

0

20

40

60

80

100

120

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Number of active rigs Barrels/day (thousands)

Rig count

Production

New Mexico’s economy continues to depend on energy

16Note: Values prior to 1997 extrapolated from SIC coded data. Employment data only available to 1981. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics.

0

1

2

3

4

5

6

7

0

2

4

6

8

10

12

14

16

18

20

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Percent Percent

Mining Share of GDP

Mining/Logging Share of Employment

Some states rely heavily on severance taxes

57.0

52.6

28.0

20.0

9.7 9.2

4.31.4 1.2

0

10

20

30

40

50

60

AK ND WY NM OK TX LA US CO

% of Total Tax Revenue

Source: US Census

Percent

17

Natural gas prices low

Note:Prices are weekly average ending on 9/13/19SOURCE:EIA

0

2

4

6

8

10

12

14

16

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

$2.68

Dollars per MMbtu, weekly

18

Natural gas production a record every year

SOURCE: EIA

0

20

40

60

80

100

120

1990 1995 2000 2005 2010 2015 2020

US Total

Marcellus (PA, OH, WV)

Texas

Billion cubic feet per day

19

Natural Gas Production by State

Note: Data shown are monthly for June 2019.Source: EIA

20

Crude Oil (mb/d) Natural Gas (bcf/d)

• World 81.61 • World 407.48

• U.S.* 12.40 • U.S. 98.09

• Russia 11.29 • Russia 66.82

• Saudi Arabia 9.75 • Iran 33.00

• Texas * 5.52 • Texas 24.48

• Iraq 4.81 • Qatar 22.33

• Canada ** 4.60 • Pennsylvania 18.73

• China 3.73 • Canada 16.80

• U.A.E 3.06 • China 16.39

• Brazil 2.94 • Norway 11.07

• Kuwait 2.64 • Saudi Arabia 8.33SOURCES: EIA; IEA; Oil and Gas Journalbcf/d: billion cubic feet per dayCrude oil data for Aug 2019; Natural gas data for June 2019;• * Based on average of preliminary weekly estimates for Aug 2019.

Global O&G Production

21

U.S. crude exports surge after lifting of export ban

0

0.5

1

1.5

2

2.5

3

3.5

2010 2020

Crude oil exports

Source: EIA

Mb/d

22

U.S. Total Product Imports and Exports

0

1

2

3

4

5

6

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Petroleum products exportsPetroleum products imports

Source: EIA

Mb/d, 3MMA

23

Bulk of U.S. natural gas exports go to Canada and Mexico

0

2

4

6

8

10

12

14

2006 2008 2010 2012 2014 2016 2018 2020

Total exportsExports to CanadaExports to Mexico

Source: EIA

Billion cubic feet per day, SA 3MMA

24

U.S. LNG exports rising

0

2

4

6

8

10

12

14

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Total exportsPipeline exportsLNG exports

Source: EIA

Billion cubic feet per day, SA 3MMA

25

Energy Survey indicators weak in Q3

26

Index

SOURCE: Federal Reserve Bank of Dallas

-20

-10

0

10

20

30

40

50

60

70

80

BusinessActivity

CapitalExpenditures

Employment CompanyOutlook

Uncertainty End of YearPrice Forecast

($/barrel)

Q3 2018 Q4 2018 Q1 2019Q2 2019 Q3 2019

$60(2018)

$69(2018)

$57(2019)

Outlook

• Geopolitical risks have increased • Lower crude oil production growth in the U.S. in 2019 and

2020• Saudis trying to reassure markets and keep prices stable• US oil production growth weakening• Energy industry major driver for the New Mexico economy• U.S. energy exports continue to rise• Expect to see continued uncertainty and volatility in the

market.

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www.dallasfed.org

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