The oil price rout wasn’t much of a shock to ConocoPhillips executive Jim Duncan. The story first had played out in natural gas, as unconventional production took over, and the oversupply still is looking for a home.
Duncan, who directs the commodity market research team for the large independent, was the opening keynote speaker on Wednesday at the Genscape Oil & Natural Gas Symposium in Houston. He is a frequent speaker at energy meetings because of his insight and understanding that history can, and often does, repeat itself.
The current energy market isn't for the weak of heart, he said to a standing room only audience.
"It's an interesting dynamic today," he said. Last year, "we were staring at the market that was poised or holding its breath trying to figure out where it would next go...If you look at everybody's five-year outlook at this time last year, it still had the hockey stick graphic going up..."
The price decline was seen as a short-term phenomenon. Now, no one knows if the market is headed up, down or sideways. "I would do just about anything...do any data set if I could come up with something...accurate about what is going to happen next."
This past year has been "the biggest change" in the energy sector's history. And an uplift in oil prices looks increasingly unlikely over the coming year. Natural gas prices don't look to strengthen at all.
"Some of us stood around and watched natural gas going from $14 in 2008 and then we saw this new form of productive capacity and excitement" in the unconventional gas fields, said Duncan. "Supplies increased and increased and increased."
Like gas markets, the oil sector is reeling from the full effect of "avalanche theory." An avalanche can't occur without a lot of snow on a mountain. But which snowflake is going to cause the avalanche?
"What we see is not a firm break but oversupply, oversupply, oversupply until we get a managed hold on what we produce and when demand increases."
Forecasting the shape of a price recovery is a guessing game. A swift recovery would be V-shaped, a steadier recovery could be U-shaped. Duncan thinks it's more likely to be W-shaped, or even "Willie Wonka" shaped, moving sharply up and down.
The U.S. energy sector "has probably responded faster in this market than I've ever seen," he said. "If you were looking for a dynamic response from the market, you've seen it." But natural gas still is looking for a "production change. It lives in a very narrow bandwidth; we are still looking to fill storage...But what is full in a compressed economy? The science part of me says in a compressed economy, we probably compress or maybe liquefy it...The question, too, is whether we have an outlet..."
The "majority" of onshore U.S. gas beyond the Northeast today is associated gas from oil wells. "if we stop drilling for oil, we start losing our oversupply..."
Gas markets still are looking for direction.
"Cash contracts are more volatile...Canadian imports are heading down...Mexican exports are expecting to be a much larger number, pushing to 3 Bcf/d of exports. Two years ago it was 1 Bcf/d and it could grow to 5 Bcf/d in Mexico in the next five years..."
Meanwhile, the "list of new plants to take advantage of low cost natural gas has grown considerably," he said. The types of plants range from methanol to automotives, toys, plastics, ethane crackers..." Still, "from where I'm sitting now, what I see in the next 12 months impacting natural gas the most will be the drop off in drilling."
Construction continues within the Northeast to carry gas to markets. But there's still more gas than the country needs.
"We own the most advanced system of natural gas than any in the world and we're still not done," said the ConocoPhillips executive. Even during the polar vortex two years ago, "winter was hit by a volley of natural gas," with little impact overall on prices.
A constrained system "ends up with very few degrees of freedom." The U.S. gas market is "a dynamically closed system that is very tied to weather," but it's remained a "quiet system" for a while. "Volatility is nil."
He expects it to be that way for a while. "Industry demand is going to increase...I have a list of customers on my desk asking for new natural gas supplies out 10 years...but it is 10 years.."
Duncan tracks 384 U.S. producers and has ranked them by the risk of credit default, net present value and revenue-to-debt. "The reality is, 277 are what I would consider 'on the bubble.' It doesn't mean they are going to fail..." but they are definitely constrained.
"On a very basic level" investors are going to train their positions on producers with the healthiest balance sheets. The market is going to be downsized.
ConocoPhillips, the largest independent in the United States, "is going to be around," Duncan said, "but there's going to be considerable shrinkage...That's the key word, shrinkage..."