By mid-January, as China headed into its Lunar New Year celebration—an event during which the country largely shuts down and people travel to visit family and friends and often use the week-long holiday for vacations outside of the country— neighboring foreign governments began instituting travel bans preventing Chinese people from coming to their countries. Airlines were forced to shut down travel routes, severely disrupting Asian travel markets and sharply reducing aviation fuel consumption.
Crude oil prices almost immediately reacted to the virus announcement. Prices were in a freefall by the time the Chinese government announced it was quarantining roughly 150 million people living in various regions of the country. People were forbidden to leave their homes, although officials permitted a single family-member to leave to shop for food and other necessities. Companies were shut down for the holiday but their closures were extended for an additional week to help limit the virus from spreading.
With health officials questioning the accuracy of Chinese statistics about the number of people infected and the total death toll, analysts attempting to quantify coronavirus’ impact on economic activity and oil consumption started throwing out wild estimates. Would this virus be like SARS with minimal numbers of people dying, or like the 1918 Spanish flu that infected 500 million people, a third of the world’s population, and killed 20-50 million? Covid-19 death tolls were estimated to range anywhere from a few tens of thousands up to a billion people.
As China’s economy shut down, energy use plummeted and OPEC panicked. An emergency meeting of its technical staff recommended an immediate 600,000 barrel per day cut in exports on top of the 1.7 million b/d cut already in place. This latest recommended cut has yet to be agreed to. Forecasters have been revising near-term and full-year 2020 demand estimates, and possible oil price targets. Oil prices below $40 were considered a high probability by some, especially when the IEA projected a 1Q 2020 oil demand decline of 450,000 b/d, the first such drop in over a decade.
As the spread of the virus appears to be slowing, oil prices are rebounding. This may yet prove to be the calm before the storm, but expectations suggest a less drastic impact on economic activity and oil demand than the scare scenarios put forward earlier. This wildcard is not finished impacting the oil market, as it will reduce total consumption and pricing from earlier expectations. Focus will now shift to the second half of 2020, and importantly, the outlook for 2021. Will we return to the more traditional 1-1.5 million b/d demand growth in 2021?
Natural Gas:
Surprisingly, the coronavirus wildcard is impacting the U.S. natural gas market at a time when winter weather traditionally would be dominating the news. This winter has been warmer than usual, causing weekly gas storage withdrawals to trail those of last year, but stay aligned with the 5- year average withdrawals. At the same time, gas output continues growing, as associated gas from Permian shale oil wells has increased unabated. Oil drilling in the Permian is slowing due to lower virusimpacted oil prices, but declining oil volumes are being offset by expanding gas output from shale wells.
While some parts of the nation have experienced bouts of bitter cold and wintery weather reminiscent of past severe winters, these cold spells have been short-lived. The lack of extended serious winter weather contributed to Henry Hub gas prices falling well below $2 per thousand cubic feet, marking the lowest February gas prices in decades.
LNG exports and gas volumes being pipelined to Mexico have helped to support the gas market and prices. The latest market help came from an increase in the daily shutdowns of nuclear reactors, prompting increased natural gas consumption for powering gas-fired electricity generators to offset the lost nuclear output. Forecasts call for more nuclear plant maintenance this spring.
The gas market can use all the help it can get, as Covid-19 is impacting LNG markets in Asia and elsewhere. Last October, Asian LNG prices had fallen to $6/Mcf from over $10/Mcf in 2018. With Japan opting for cheap coal to fuel power plants, and significant portions of China’s economy and territory shutdown, LNG consumption is falling and pressuring exporters. Asian LNG prices are currently under $3/Mcf – prices never seen that low before.
According to Bluegold Research, global LNG landed prices are down nearly 30 percent month-on-month, and down 56 percent year-on-year. The Gulf Coast LNG futures contract is currently averaging $2.15 per million Btu, 25 percent below the landed price. At such low prices, many LNG exporters cannot make money on cargos shipping now. We fully expect to see extended repair and maintenance outages for LNG export terminals this summer, as gas producers look for global gas inventories to be drawn down and LNG prices to rebound.
Low U.S. gas prices, which have characterized our gas market for quite a while now, show no signs of improving in the foreseeable future. As new LNG exporters commence operations, the world appears to be grossly oversupplied with natural gas, depressing gas prices everywhere. While we would like to think this is a temporary condition, it seems the U.S. has exported its low natural gas price-environment worldwide, unfortunately eroding its competitive advantage in the global LNG market. Is this transitory, or is it the new reality of the global gas market?
This story was originally featured in ON&T Magazine’s March 2020 issue. Click here to read more.
