Market Newsletter – April 2020April 01, 2020
“In abundance, prepare for scarcity.” -Mencius
This simple directive, although two-thousand years old, carries significant weight in our present global economy, daily lives, and of course, the energy markets. One could argue that it has always been a prudent approach, one witnessed in the most fundamental rhythms of the natural world, and now is simply a more salient advisement. Each of us have undoubtedly experienced this newfound scarcity in one way or another – whether it be necessary restrictions on our personal movements, increasing isolation from family, friends and co-workers, or limited to access to goods and products that were previously widely-available – and this is all on the heels of what we may now view as robust abundance. In several ways, energy commodities and end-user opportunities are beginning to mirror this reversal of abundance, and what may follow, much like our daily lives, will require tolerance adjustment.
Yesterday, the EIA released a report showing that in 2019, US energy production exceeded consumption for the first time in 62 years. Another notch on the belt of an historic 2019. Unsurprisingly, the largest jump in total energy production by source was from natural gas, which increased from a 25% to 35% share. The commodity also saw the greatest surge as a source in energy consumption, up from 24% to 32%. The production growth was well-documented throughout 2019 and was reflected in massive storage reserves (still at 63% above last year at this time) and some of the lowest market settles in decades during the past few months – the March 2020 spot price, for example, averaged $1.74/MMBtu. Abundance, for the end-user, has provided unprecedented opportunities to secure historically low commodity supply agreements for the better part of a year. However, for every winner there is a loser – and this case, a multitude of casualties are underway.
Fast-forward to today, and we find that several of the fundamentals have been significantly altered, both by COVID-19 demand destruction and OPEC+ production. Prior to each of these course-altering global events, US natural gas prices were already very weak, which had triggered a series of capex cuts, divestment, and reduced drilling activities from exploration and production companies. As this data began to work its way into the daily balance, and production forecasts were revised significantly to the downside (decreased supply), price support began to surface in parts of Feb and Mar, albeit slightly and intermittently – and there existed a glimmer of hope for producers that low prices would begin to cure low prices. And they did, for a while – until the COVID-19 pandemic quickly altered demand patterns on a global level, and with domestic industrial and commercial demand significantly impacted overnight (and continuing be to uncertain extents) any support gained from anticipated supply reductions was met with even greater demand reductions in the near term. This brought the prompt month settles back down to previous lows, while the futures contracts continued their steady climb, resulting in drastic contango conditions wherein the spread between the prompt month contract and the upcoming winter contracts was upwards of $1/MMBtu. These contango conditions persist to this day, but at elevated price points. In other words, the entire curve has moved up in unison over the past week, and the oil crash has everything to do with it.
Monday, April 20th, will go down in history as the first time ever that WTI plunged into negative territory, settling at -$37.63 per barrel. Granted, the contract did bounce back in a big way the following day (when the contract also expired), settling at $10/barrel, and the spot pricing has remained relatively stable at around $13/barrel since – a far cry from the $46/barrel that commodity commanded a little over a month prior. OPEC+ flooding the market ahead of/in the midst of demand decreases and the resulting supply glut simply cannot be mopped up with production cuts that are, likely, too little too late – the damage has been done and the picture remains bleak for May and June. The oil price scenario and lack of demand is leading to a situation in which the increasingly limited ability to store oil, particularly in Cushing, the largest storage facility in the US, will result in production shut-ins as soon as May.