March 23, 2020
APPI Energy is committed to monitoring the COVID-19 developments and how it is affecting the current energy markets and what that means for the foreseeable future. We are dedicated to serving our clients and making the best recommendations based on the market and client needs, even in the most uncertain of times.
Last week, the prompt-month (April) natural gas contract closed Friday, March 13th, at $1.87/MMBtu. Pressuring prices downward, natural gas demand is likely to decline on a combination of spring-like weather engulfing most of the country coupled with a likely reduction in demand from COVID-19. Total U.S. consumption of natural gas fell by 10% compared with the previous week. Natural gas storage levels are currently 12.5% higher than the five-year average at 2.043 trillion cubic feet (Tcf).
There are several factors, however, that may spike prices upward. The Saudi Arabia/Russian oil war has driven prices from $41 to $30 per barrel, roughly a 25% drop. Lower oil prices create more pressure on US oil & gas companies already operating below break-even costs ($45/barrel) and struggling with high debt. Well over 30% of the country’s natural gas production comes as a by-product of drilling for crude oil. The drilled-but-uncompleted (DUC) well inventory in the Marcellus/Utica basins are almost depleted and new drilling permits have evaporated due to the prolonged low-price environment. Capital investment for new well and pipeline development has vanished from the market and is unlikely to reappear until prices rise substantially and for a sustained period of time.
Bottom line, two opposing forces are pressuring prices. Lessening demand due to milder spring weather and the economic impact of COVID-19 are pressuring prices down. On the other hand, low prices are squeezing both oil and gas producers to limit new well development which will likely result in a substantial production shortfall later this year. The question is when will production tumble and drive price upward.
COVID-19 has made a need for cash imperative now in both the energy sector and many parts of the economy. Longer term, lower oil production in 2020 and 2021 would be bullish for natural gas prices. The COVID-19 event has shifted the U.S. from a “rational” market environment to an “irrational” one where fear and momentum are driving prices. History shows irrational market environments are short-lived. While there are business uncertainties caused by the virus, history shows that rational markets revert to the mean. This means business will return to normal and economic growth will resume. Since the oil war was not caused by the virus but an effort to regain market share, the economic recovery, at least temporarily, will take place in an environment of lower energy prices.
What should you do now? Be sure to review your energy plan. With an eye towards the long run, review where prices are today for calendars 2021 – 2025 with where they were a few weeks ago. APPI Energy is here to assist and answer any questions and help alleviate your organization’s energy needs and costs. Contact us today to review your energy plan at 800-520-6685.
Written by: APPI Energy
Sources:
Constellation Energy Market Intel Webinar March 2020
Energy Research Council