Lower Rockies production, maintenance issues could boost Opal prices

Denver — Contentious regulatory issues in Colorado have taken a back seat in the Denver-Julesburg Basin as companies slash activity under the weight of weak oil prices, which could provide a boost to the Kern River, Opal hub later this year as associated gas production declines in the region.

DJ rig counts continue to fall amid crippled WTI crude prices, fueling lowered production expectations moving forward, which should pose upside risks to pricing, according to S&P Global Platts Analytics. Active DJ rigs have shrunk to 11, down from 26 one month prior and 28 a year ago. The price plunge prompted quick producer pullback.

Last week, Denver-based PDC Energy announced it would cut salaries and offer voluntary buyouts in order to help reduce its 2020 capex budget from $1.1 billion to approximately $550 million. PDC produced 19.5 million barrels of oil in 2019, according to data from the COGCC, making the company the fourth most prolific producer in the state, trailing Occidental Petroleum, Noble Energy and Extraction Oil and Gas.

Also last week, Noble said it will slash its budget to about $850 million, or 50% less than original 2020 capital expenditure plans.

"Recent events have had an unprecedented and unpredictable impact on the global economy and the oil and gas industry," said Noble CEO David Stover.

DCP Midstream, the largest natural gas processor in the DJ, has cut $450 million from its prior 2020 capex plans.

Projections from Platts Analytics now show natural gas production declines in every basin in the Rocky Mountain region by the end of 2020, including the DJ, Williston, Powder River, Green River Overthrust, San Juan and Piceance. Platts Analytics is forecasting production to shrink starting in Q4 2020 and extend through July 2022 across the entire region.

Rockies' production declines, combined with lower pipeline flows from West Canada to the US Pacific Northwest due to maintenance issues, have added bullish sentiment to Opal even as the coronavirus pandemic reduces demand.

Despite ongoing maintenance events in the Pacific Northwest, Opal pricing has felt downward pressure in the past week as Ruby Pipeline declared a force majeure, stranding some Rockies supply.

However, stronger prices are likely moving forward as Ruby flows to the Pacific Northwest have rebounded over the past week, with flows averaging just over 1 Bcf/d as supply curtailments from western Canada continue, according to Platts Analytics.

Should crippled WTI crude prices persist, production expectations in the DJ and Powder River Basins could get even lower. Falling production across the Rockies should provide additional upside risk to Opal, which was expected to face a bearish pricing outlook prior to the pandemic, according to Platts Analytics.

Opal's balance-of-summer contract has ticked up, as the remaining summer strip settled at 33 cents/MMBtu below Henry Hub on Thursday, roughly 12 cents stronger than a month ago. Assuming underutilization of cross-border corridors continue and production declines occur, Opal could face incremental upside moving forward.