The Tortoise North American Oil and Gas Producers IndexSM returned 10.2% in the fourth quarter, bringing 2019 performance to 6.7%. Oil markets experienced some much needed stability in the fourth quarter after a tumultuous third quarter. With trade tensions easing and the global economy not showing any signs of a slowdown, demand growth is currently expected to improve in 2020, which should bring worldwide supply and demand into better balance. Crude oil prices, represented by West Texas Intermediate (WTI), began the quarter at $53.62 per barrel and troughed quickly thereafter at $52.45 on Saudi claims of minimal disruption to production after the attacks on the Saudi Aramco processing facilities at Abqaiq and Khurais. Prices trended upward throughout the rest of the quarter following a successful Organization of Petroleum Exporting Countries (OPEC) meeting and peaked at $61.72 on Dec. 27, 2019 before ending the quarter at $61.06.
U.S. crude oil production growth is expected to broadly moderate in 2020 and 2021 as compared to the rapid growth over the past two years. Specifically, U.S. crude oil production is projected to average 13.3 million barrels per day (MMbbl/d) in 2020 and 13.7 MMbbl/d in 20211. U.S. upstream companies are facing increased pressure from investors to exhibit capital discipline and rein in production growth in favor of higher free cash flow generation and return of capital to shareholders. Nonetheless, with multiple years of tremendous production growth, propelled by the U.S. shale revolution, the U.S. became a net exporter of oil and petroleum products for the first time in recent history in September 2019 with net exports projected to grow into 2020 and beyond1. Rising U.S. energy exports of liquids and natural gas are expected to positively affect the U.S. trade deficit and will ultimately help reduce global CO2 emissions as lower-carbon energy sources, along with renewables, take market share from coal.
OPEC and their Non-OPEC partners (OPEC+) announced in December a clear goal of establishing a floor for crude prices through the seasonally weaker first quarter. OPEC+ members agreed to an incremental 0.5 MMbbl/d cut to the existing agreement taking the official cut to 1.7 MMbbl/d for the first quarter of 2020. In addition, Saudi Arabia agreed to continue its over-compliance of 0.4 MMbbl/d, implying a new commitment level of 2.1 MMbbl/d of cuts. Saudi Arabia is focused on stabilizing crude oil prices following the recent Saudi Aramco initial public offering. While the deal was not extended, OPEC+ did set a date for an extraordinary meeting to be held in early March 2020 to determine the need for additional cuts. Emphasis will likely be placed upon improved compliance from various OPEC members with poor historical compliance (Iraq, Nigeria and UAE).
Natural gas demand has remained robust supported by record levels of domestic power burn, increased exports to Mexico and record liquefied natural gas (LNG) exports driven by the startup of three new liquefaction and export facilities (Elba Island, Cameron LNG, Freeport LNG). However, surging natural gas supply more than offset strong demand, resulting in an elevated pace of inventory builds and pricing pressure through much of the fourth quarter. Natural gas prices, represented by Henry Hub opened the quarter at $2.37 per million British thermal units (MMBtu), peaked at $2.87 on Oct. 8, 2019 with colder than average weather in the Midwest, before trading down below $2.00 to trough at $1.75 on Dec. 27, 2019 and ended the year at $2.09 per MMBtu.
Persistently low natural gas prices have prompted natural gas producers to rein in capex budgets and drilling programs in 2020. While natural gas production is expected to continue growing, the pace of supply growth is set to slow measurably, with production expected to average 93.7 billion cubic feet per day (Bcf/d) in 2020 after averaging 92.1 Bcf/d in 20192. The backdrop of slowing production growth and strong domestic and export demand paints a future picture of improving natural gas fundamentals in the future. The second wave of LNG export facilities, led by final investment decisions (FIDs) made to Exxon’s Golden Pass and Venture Global’s Calcasieu Pass LNG export facilities in 2019, will provide another meaningful catalyst for natural gas export demand growth from 2022 to 2025.