The combined one-two punch of ongoing demand destruction wrought by coronavirus (COVID-19) and obstinate overproduction by several key countries has sent crude prices reeling. As of early April, WTI was pricing in the mid-20 dollars per barrel range, with some heavier crudes in the teens or even single digits. And given that the demand impact will linger after COVID-19 has been brought to heel - and that US crude production is particularly vulnerable to low prices - IHS Markit is forecasting a significant (>26%) decline in American oil output.

This, in turn, will have a significant impact on the production of "associated" natural gas. That is, natural gas production that comes from the same well as crude oil. IHS Markit expects such associated US gas output to fall by around 20% over the next two years. Some of this will be offset by higher "non-associated" production but, overall, US gas output is still poised for a major pullback in the coming years due to the ongoing low-price environment.

Lower natural gas output will, unsurprisingly, have an impact on production of the natural gas liquids (e.g. ethane, propane) that are derived from the gas stream. These natural gas liquids (NGLs) are a relatively important - and lucrative - link in the hydrocarbon value chain. They have myriad uses, perhaps most irreplaceably as precursors in the production of petrochemicals and plastics. And mirroring the surge in US natural gas output recently, field NGL production increased by 27% between 2017 and 2019.

Figure 1: US natural gas liquids production outlook

Prior to COVID-19, IHS Markit had expected US NGL production to continue its strong growth, with a nearly 19% increase forecasted by 2021. This growth will stall in the wake of COVID-19 but, notably, US NGL output is not expected to decline significantly between 2019 and 2021. Natural gas output will, as noted, decrease but a lower rate of ethane rejection (ethane being left in the gas stream) will keep total NGLs production more or less flat over the next two years. However, given that US and (especially) global demand for NGLs is still forecast to grow in the next two years, this US NGL "reset" could spell trouble for the petrochemical supply chain.

Veeral Mehta is a director on the Midstream Oil and Natural Gas Liquids (NGL) group at IHS Markit.

Posted 09 April 2020

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.