Crude oil prices took a nosedive at the close of 2014 with prices dropping nearly 40% in the second half as market dynamics were being manipulated in a way to undercut prices rather than support price improvement.

Saudi Arabia announced price cuts to U.S. customers in order to maintain market share in November, followed by OPEC announcing in December that it would not cut back production.

This wouldn’t be so troublesome if it weren’t for the fact that OPEC members have extremely low production costs, with Barclays Capital reporting that Saudi Arabia has production costs as low as $4 per barrel (bbl).

However, while Barclays anticipates a crude price rebound in the second half, roughly half of proven and probable remaining U.S. tight oil reserves would be challenged if prices fell to $70 per bbl for all of 2015 with fewer new volumes being produced in the second half and 2016.

There is still a question over whether lower crude prices could support the U.S. lifting its nearly 40-year ban on crude exports. Although not a certainty, there is a very strong likelihood that this topic will at least be debated in Congress this year.

OPEC actions indicate it is seeking to hurt the U.S.’s nascent tight oil industry by lowering its profits on a short-term basis to limit competition. The case can be made that such actions actually support opening up access to new markets for U.S. producers in order to help support the growth of this industry.

The NGL link

With the crude market in flux, the NGL and natural gas markets took similar downturns. A further headwind to NGL and gas prices was the moderate temperatures at the start of the heating season.

If the past few years have been a period of NGL prices decoupling from crude and gas prices, the last few weeks have shown that these products are still linked.

Ethane prices have deteriorated because of both planned and unplanned cracker turnarounds that have caused a tremendous storage overhang. The industry is approaching full cracking capacity, but will take time to work off storage. A new headwind has emerged for ethane with falling propane and butane prices, as propane is now the most preferred ethylene feedstock.

The lack of heating demand caused propane prices to also tumble despite steady LPG exports and increased cracking demand with propane margins having the sharpest drop of any NGL from November to December.

Frank Nieto can be reached at fnieto@hartenergy.com or 703-891-4807.

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