An eye on the future: Energy Insights
As some of our clients start to reopen their offices, and there are indications that the world is starting to return to a new normal, at GaffneyCline we want to make sure that our future communication with you continues to be effective and serves a purpose. Over the next two weeks we are therefore taking this opportunity to refresh our Energy Insight newsletter series, and your feedback is critical.
Please complete the 10 question, multiple choice survey to help guide these changes – the Energy Insights are for you after all. It should only take 1-2 minutes of your time.
Natural Gas – US up, Europe down
The gas market in the US continues to drive a variety of opinions about what the remainder of 2020, and indeed next year, will bring.
While LNG cancellations and the continuing effects of the lock down are dampening expecations for gas demand, the tightening supply situation continues to put longer term pressure on the market. Both the anticipated drop in crude production from the Permian and other gas-rich basins, and the lack of drilling in the gas prone basins are creating expectations of a price response as we go into next Winter. The decision by some Northeast producers to hold back production has also created a price response in the with Henry Hub (Jan ’21 delivery) up over 60c from March when the market collapse started, albeit having fallen back in May.
As Henry Hub has strengthened somewhat, the situation in Europe has moved the other way, with European and UK gas prices now falling back rapidly, currently sitting at around $1/MMBtu. As the heating season closes out, and storage in Europe approaches its limits, its possible that we will see even lower prices, and a lot more price volatility before the outlook stabilizes again. In the meantime, of course, more cancellations of US cargoes are likely.
These issues were discussed in more detail this week at a webinar hosted by GaffneyCline and Akin Gump, looking at the post-Corona prospects for gas and LNG globally. A recording of the hour-long discussion, and Q&A can be found here.
Crude Oil – What next after a rebalance?
The US is not alone in cutting back production. Supply around the globe, in both OPEC and non-OPEC countries, has responded more sharply than many have expected, indicating that the rebalancing of the crude market is well under way. According to Energy Aspects, global Capex cutback has already exceeded US$100 billion this year, which implies that global supply may be rather tight in the medium run assuming global demand reaches or exceed the 100 MM barrels per day level of 2019.
As of last week, US production of crude oil stands at 11.5 million barrels per day, marking a reduction of 1.7 million barrels per day from the peak at the beginning of the year. Further cuts are expect before June. Oil production in all major tight oil basins has been decreasing and shut-in production in the Permian and Bakken are most significant, at approximately 450,000 and 200,000 barrels per day, respectively. With shut-ins and shrinking drilling activities across all liquid-rich basins, the trend of a production decline will continue. The key question is how long will this continue? Will this go beyond 2020?
On the storage side, US crude oil inventory decreased by 3.1 million barrels from the previous week, despite that many analysts had expected another week of crude build. Although still above the five year average for this time of the year, this decrease is a strong sign that the severity of the global oversupply has been easing down. As a result, the WTI futures price has recovered some of the losses incurred in March and April, reaching almost $34 per barrel on May 21.
However, the forward curve for 2020 and 2021 is relatively flat, suggesting that the market is still wary about Global Supply/Demand being in balance. In terms of gasoline demand, it is projected that COVID-19 will have a bigger impact than the 2008 financial crisis, as this pandemic hits mobility especially hard. With several tech companies announcing policies to allow employees to work from home permanently, oil demand may reduce in the long run after COVID-19. However, there is still huge uncertainty about whether COVID-19 will permanently destroy oil demand. One could argue that, as the global economy gradually recovers, the relatively low oil price could stimulate oil demand growth. In addition, the pandemic may leave a long-lasting mark of social distancing on people’s minds, which could reduce the use of mass transit and ride-sharing services and increase the use of delivery services. Some people may choose to migrate from big cities to less dense areas where more driving is needed for daily commute.
There are lots of scenarios for oil supply and demand. Each is predicated on assumptions about technology, public policy and societal responses causing change. Is this wishful thinking, or the start of something different?