IHS Markit : America Takes Pole Position in Oil and Gas

While the Ukraine crisis was raising anxiety about Europe’s dependence on Russian natural gas, something remarkable happened. Last month, for the first time ever, U.S. exports of liquefied natural gas to Europe exceeded Russia’s pipeline deliveries. Russian exports, which normally account for about 30% of Europe’s gas use, dropped substantially because of Russian pricing. And with European gas prices about four times as high as normal, U.S. exports surged to fill the gap.

The extraordinary growth in U.S. oil and gas production is a geopolitical and economic asset for the U.S. that contributes to global energy security. As the domestic oil-and-gas industry continues to rebound from the spring 2020 price collapse caused by the onset of Covid, the U.S. is again the world’s top oil producer-almost 20% above the other two largest producers, Saudi Arabia and Russia-and the world’s top natural-gas producer.

The global oil market, which was drowning in oversupply less than two years ago, has tightened dramatically as the world emerges from Covid shutdowns. That makes the market vulnerable to crisis. Russia’s push on Ukraine, a rebounding global economy, major weather events, or a surprise event could send prices soaring.

That is what oil prices above $90 a barrel are signaling. If there is a new nuclear agreement with Iran that brings its oil back to market, that could moderate prices some. But unless a new virulent Covid wave causes more shutdowns (or the Omicron variant slows China’s economy), prices will remain high.

The shock absorber for averting crisis is “spare capacity,” the sum of the potential output from wells that is currently not produced but can be turned on during a disruption. Spare capacity has shrunk as the rebounding world economy has pushed demand up and some oil-exporting countries, because of underinvestment, haven’t been able to return to former production levels. Almost all the spare capacity that now exists-about three million to 3.5 million barrels a day-is concentrated in two countries: Saudi Arabia and the United Arab Emirates.

One critical offset to the tightening market is the current upswing in shale output from the U.S., which could add more than 900,000 barrels a day this year. Without the resurgence in U.S. supply, oil prices would likely be even higher.

With new export capacity coming this year, the U.S. will become the world’s largest LNG exporter, ahead of Australia and Qatar. In a tight global gas market, U.S. LNG is critical to avoid a world-wide shortage and keep the lights on in Europe, as demonstrated by the flotilla of tankers headed to Europe….
Source: IHS Markit Ltd.