American Oil and Gas Reporter - May 2022 - 67

SpecialReport: Markets & Compression
independents continue to accelerate investments
in the Permian Basin, leading
to an increase in associated gas. But
these gains are likely to prove insufficient
to meaningfully change the long-term
narrative by mid-to-late summer.
Potential Supply Shortage
Instead, with the end-of-season storage
trajectory draws coming into clearer focus
as the injection season wears on, a lack
of sufficient production growth may amplify
market fears of a potential supply
shortage next winter, sending prices another
leg higher to fresh highs.
The principal fundamental factors
underlying the monster early April rally
and a secondary rally in early May-a
storage trajectory too low for market
comfort and few levers to pull to quickly
correct higher-remain intact. However,
early projections suggest that the May
monthly injection may total close to
500 Bcf, potentially reaching the largest
cumulative May injection on record.
For this outlook to come to fruition,
however, production may have to rebound
from early-month woes, LNG
feed gas demand may need to remain
weak amid continued maintenance, and
weather-driven demand may need to
remain bereft of extreme temperatures.
In other words, record May injection is
far from a lock.
The most likely scenario, suggests
that a significant May injection may total
75-90 Bcf larger than the five-year average
and soften the extent of recent bullish
momentum. That would narrow storage
deficits in the near term, but it would be
a mistake to extend any near-term softness-should
it materialize-into the summer.
In a world without supply constraints,
the market will probably enter next winter
with closer to 3.8 Tcf or more in storage.
The 350 Bcf difference implies that the
current fundamental outlook is at least
2.0 Bcf/d tighter than the market ideally
wants. Any early summer bullish catalysts
could enable the forward curve to press
higher.
In the medium term, power sector demand
may soar on surging loads and
coal supply concerns, LNG feed gas is
likely to rebound, and production may
remain slow to move higher. The longterm
storage trajectory remains unacceptably
low, and until it corrects, the balance
of long-term price risks for NYMEX futures
remains elevated. With NYMEX
front-month prices already eclipsing 14year
highs in April and May, further
upside price risks remain likely ahead of
the start of next winter's heating season.
Crude Oil Outlook
Paralleling the U.S. gas market, upside
price risks driven by inventory shortages
across both crude and finished products
far outweigh the potential for a downside
correction moving through the summer
months (Figure 3). While total U.S. distillate
inventories remain well below fiveyear
minimum levels (Figure 4), global
shortages are even more acute as Russian
distillate supplies are restricted.
In the United States, Cushing inventories
remain in danger of steep declines
that can prompt " tank bottom " fears and
renewed risks of price spikes.
Russian supplies may wither as sanctions
and embargos begin to bite. While
Asian buyers continue to pick up Russian
barrels at a discount, supply contracts
rolling off from Western companies are
unlikely to be renewed and Russian output
continues to trend lower. By mid- to late
summer, declining Russian production
may become even more evident, helping
further ratchet tight market fundamentals
and support the bullish outlook.
At the same time, the market will
begin to look ahead to the end of Strategic
Petroleum Reserve releases this fall. The
Biden administration is aiming to release
1 MMbbl/d for six months, with another
60 million barrels from other countries,
which is helping paper over massive
near-term shortages. The question remains,
however: What will happen when the
SPR releases wind down? As the market
increasingly looks beyond the current
SPR supplies by mid-summer, returning
upward pressure on global oil markets
remains likely.
❒
ELI Z.
RUBIN
Eli Z. Rubin is a senior energy analyst at EBW Analytics Group, which conducts
energy market research and analysis. An expert in econometrics, statistics, microeconomics
and energy-related public policy, Rubin is instrumental in designing the algorithms
used in the company's models, and in assessing potential discrepancies between
theoretical and practical market effects of models and historical results. He holds a
B.A. in economics, environmental studies and Middle Eastern studies from the University
of California, Los Angeles.
MAY 2022 67

American Oil and Gas Reporter - May 2022

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