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Cross-commodity factbox: US energy markets in 2017

Washington (Platts)--3 Jan 2017 134 pm EST/1834 GMT


With higher prices and increasing export demand, the oil and natural gas industries in the US face 2017 on a reasonably bright note. All eyes continue to focus on the change of administration in Washington, where the potential for significant policy shifts are creating uncertainty. Nuclear faces financial pressures from low power prices, and the power market looks likely to be squeezed by expanding gas and renewables in the generation mix. A huge question mark remains over coal, with retirements and the implementation of the Clean Power Plan at the fore.

Here is a brief overview of what to watch for in 2017.


OIL


US crude producers are eying 2017 optimistically, following a sharp price rise in 2016 and lower operating costs.

NYMEX WTI crude futures rose from less than $27/b in February to the low to mid-$50s/b, prompted by a drop in US rig counts and output, and by an agreement between OPEC and several non-OPEC producers to cut output.

Shale crude plays in the US are poised for increased drilling and production in 2017, in response to the higher crude prices.

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The Permian Basin could be the biggest beneficiary of expected double-digit increases in capital budgets in 2017, as crude production has grown in the area even during the recent downturn and could skyrocket by 2020, analysts say.

Even at current oil prices of around $50/b or slightly lower, output in the West Texas/New Mexico basin, where production hung slightly below 2 million b/d for most of could rise to an average 2.226 million b/d in 2017, according to Platts Analytics' Bentek Energy unit.

North Dakota Bakken production fell below 1 million b/d in 2016, but could eventually ramp up in 2017 if the much-delayed Dakota Access Pipeline is completed. The line would increase takeaway capacity by up to 470,000 b/d.


NATURAL GAS


A big shift in US natural gas market conditions is expected in 2017, as it continues to march toward globalization, with growing pipeline exports to Mexico and rising liquefied natural gas exports to multiple countries.

These areas of growth -- at a time when US gas production declined year on year in 2016, to 72.2 Bcf/d from 72.5 Bcf/d in 2015, for the first time since Platts Analytics began tracking production in 2005 -- point to tighter market conditions in 2017.

Gas prices at the benchmark Henry Hub in Louisiana for 2017 are expected to beat those of 2016 by more than a dollar, according to Platts Analytics' Bentek Energy, averaging roughly $3.60/MMBtu for the year. The forecast is currently in line with the 2017 NYMEX futures strip, which has Henry Hub averaging $3.63/MMBtu, up about $1.18 from the 2016 spot price average of $2.45/MMBtu.

US dry gas production is expected to grow to 74.7 Bcf/d in 2017, up 2.5 Bcf/d from 2016. Exports should reach 6.7 Bcf/d in 2017, up 2.45 Bcf/d from 2016 with Mexico and LNG exports splitting the increase fairly evenly.

Gas demand for power should fall to 24.6 Bcf/d while residential and commercial demand should rise to 25.9 Bcf/d in 2017, assuming normal weather.


ENERGY POLICY


In Washington, uncertainty is the name of the game as regulated energy sectors await the arrival of the administration of President-elect Donald Trump.

Adding to the normal disruption of new presidential appointees is the real possibility of significant policy shifts as President Obama departs.

Major roster changes among key federal regulatory agencies portend important policy shifts for energy markets in 2017.

At the Commodity Futures Trading Commission, Chairman Timothy Massad, a Democrat, was forced to table action on speculative position limits until the Trump team is in place. Big energy market players want more flexibility and are likely to push for additional changes under a Republican-led commission. Dodd-Frank is expected to be targeted by the new Congress for at least some tweaks to make it more market friendly.

At the same time, a new Republican chairman at the Federal Energy Regulatory Commission and two new Republican commissioners could bring with them different ways of thinking on critical energy market enforcement efforts. New commissioners can be expected to take a hard look at what constitutes gaming in energy markets, and perhaps throttle back on the number of such cases brought against companies active in the markets.

Conversely, cross-market manipulation is likely to continue to be pursued as the courts have been clear that such behavior is manipulative.


POWER


The transition of the US generation mix to natural gas and renewables, and away from coal, will continue in 2017, but higher gas prices could affect power-market dispatch trends, heat rates and spark spreads.

Following nearly 9 GW of coal retirements in 2016, another 7 GW will be shut in 2017 because of a combination of regulation, age and economics.

Meanwhile, 13 GW of gas-fired generation will come online following 10 GW in 2016. In addition, at least 9 GW of wind and solar will ramp up generation across the US.

The outlook for merchant generation is ostensibly positive, with forward power markets well above day-ahead prices in 2016. But gas-fired generators may actually struggle to replicate 2016 results as a move to the mid-$3/MMBtu range for the benchmark Henry Hub in Louisiana will weigh on market implied heat rates and spark spreads.

As seen with coal's five percentage point year-on-year increase in market share in ERCOT in November, higher gas prices will have a real-time impact on dispatch and bring coal plants surviving this wave of retirements back into the generation stack.

With the incoming administration of President-elect Trump, implementation of the Clean Power Plan in its current form looks unlikely and decisions about future generation will be more in the hands of states and market forces.


NUCLEAR


US nuclear plant operators say they face financial challenges from low power prices and tepid demand, mostly in the deregulated northern and western regions.

Operators have announced the permanent closure of several units, and industry groups believe up to 15 additional reactors could be set to shut in coming years. But recent developments in Illinois and New York have industry officials and some analysts believing that outcome could be avoided.

Lawmakers or regulators in both states have implemented credits to be paid to nuclear operators to compensate them for the carbon-free nature of nuclear energy. Nuclear industry officials have said they hope such programs could spread to Pennsylvania and Ohio. Political analysts expect Trump to push to restart the long-stalled Yucca Mountain high-level nuclear waste repository in early 2017. Congressional appropriators could revive the project, which would store spent nuclear fuel from utilities.

The spot price of uranium, meanwhile, has fallen sharply since it reached $70/lb before the Fukushima accident in Japan in 2011. By mid-December, some market participants indicated that the $17.75/lb spot price in early December -- a 12-year low -- likely was the floor. Many market participants now say the 14% price climb since early December -- to above $20/lb -- shows most participants think it will cost more, not less, to buy uranium in 2017.


COAL


The US thermal market saw a resurgence in the second half of 2016, entering the New Year with drivers pointing to possibilities of higher pricing and greater demand.

Price benefited this past summer with increased power generation but also received a surprising surge thanks to an energetic export metallurgical market.

Central Appalachian, Northern Appalachian and Illinois Basin thermal coals have been used as blends in the met market since its upturn, and US producers have shown restraint in ramping thermal production, which has helped to keep supply low and prices elevated. That production discipline is expected to carry into the new year, given uncertainty regarding the price rally.

CAPP rail (12,500 Btu/lb, 1.6 lbs SO2/MMBtu) prompt-month prices at year's end grew to $61/st from a low of $35/st in the spring. NAPP (13,000 Btu/lb, 4 lbs SO2/MMBtu) pricing also saw significant improvement, to $55.50/st from $33.50/st in the spring, and IB (11,800 Btu/lb, 5 lbs SO2/MMBtu) barge coal bounced back to $41.75/st from $33/st.

Coal also could rise thanks to forecasts for colder weather that helped strengthen gas prices. Powder River Basin (8,800 Btu/lb, 0.8 lbs SO2/MMBtu) coal would see the quickest benefit from high gas prices, with prompt-month prices entering the New Year at $12.15/st, up from a 2016 low of $8.20/st.

--Staff Reports, newsdesk@spglobal.com

--Edited by Valarie Jackson, valarie.jackson@spglobal.com

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