As we are all aware, this week has been unprecedented as the full impact of COVID-19 on the United States (and the western world in general) has become more acute, and we have witnessed the start of a global crude price war initiated by Saudi Arabia. These events have roiled global markets, and energy markets have been no exception. The situation is changing by the day if not the hour, and energy markets are still digesting the full impacts of these two major developments.
Crude oil prices are down approximately 25% this week as a direct result of Saudi Arabia’s decision to reverse course on further output cuts after failing to get Russia on board, and instead announce massive cuts to their prices and plans to increase production 20-30%. Prices opened Monday sharply lower, and have traded with a high level of volatility all week. The Saudis have shifted their strategy to one of trying to gain market share and drive out marginal producers, with a particular focus on shale producers in the U.S. This is also viewed as a move to pressure Russia to get on board with Saudi Arabia’s oil market plans in the future.
The fallout from this shift initially included a rally in U.S. natural gas prices as the market realized that U.S. crude production is likely to fall sharply at ~$30 oil prices, which will also lead to a fall in natural gas production as associated gas production (gas that is a byproduct of crude production) declines. After rallying sharply early in the week, prices have stabilized to close the week. Most of the moves have been in the near term 2020 and 2021 prices.
From a demand perspective, there is a growing view that demand for natural gas and electricity will decline as industry demand will decline due to COVID-19 related shut downs and declines in product demands expected from the COVID-19 pandemic and global recession that has likely already begun. For natural gas, this has already translated to some decline in LNG exports to Asia and Europe, and further demand declines are likely at this point. Prices have been under significant pressure since January coming out of a winter that has been one of the warmest on record globally.
Shifting to electricity, balance of the year 2020 prices have reacted differently in different markets across the U.S. Markets that have higher summer peaks and more potential for scarcity pricing events, namely ERCOT and CAISO, have seen a dip in prices this week particularly for the peak summer months. Other markets that do not typically see high peak summer prices, such as PJM, MISO, NYISO and ISONE saw an increase in prices early in the week as gas prices moved up, and subsequent declines later in the week as some demand reductions became more apparent. As the potential for business disruption becomes more clear, we expect to see further volatility in the power markets. The already significant closures of schools and universities are also likely to grow, driving more demand reduction.
Energy Edge is closely following developments in the energy markets in the current rapidly evolving environment. We will continue to provide frequent updates in the coming days and weeks. As always, please don’t hesitate to contact us if we can be of assistance.