Flirtin' with Disaster - COVID-19 Shutdowns Compound Weak Gas Demand Fundamentals

While the crude oil market meltdown has taken center stage in recent weeks, and for good reason, the natural gas market is bracing for its own fallout. The CME/NYMEX Henry Hub April futures price, which was already at a multi-year low, buckled last week, falling to as low as $1.602/MMBtu on March 23, and expired Friday at $1.634/MMBtu, the lowest April expiration settle since 1995. On its first day in prompt position, the May futures contract yesterday eked out a late-day, 1.9-cent gain that brought it back up near $1.70/MMBtu as traders continued weighing competing market factors. Gas futures earlier in March were initially buoyed by the assumption that the low oil-price environment would slow associated gas production — and it will, eventually. But that initial bullish sentiment was quickly usurped by the more immediate effects of demand losses resulting from the economic slowdown caused by COVID-19, as well as from mild weather. Today, we look at how these developments are shaping gas supply-demand fundamentals heading into the gas storage injection season.

Amid the many daily, sometimes hourly twists and turns of the market in recent weeks, we’ve homed in on a number of key emerging dynamics. At the beginning of March, in Free Fallin’ and Wipe Out, we took an early look at the collapse in the crude oil market and what the crumbling OPEC-Plus alliance and the COVID contagion could mean for energy markets. Then in Save It for Later, we examined how the changing structure of the crude oil forward curve is already significantly affecting the value and utilization rates of storage versus transportation assets. And in the past week or so, we’ve provided our latest analysis on the looming effects of depressed oil prices on E&P companies and their output. In Paint It Black, we assessed the slew of capital spending cuts being announced in recent days and weeks, on top of the earlier cuts already known to the market, and what they would mean for capex and production trends in 2020. Déjà Vu put the current environment in the context of previous historical downturns to understand how long it takes for drilling cuts to translate to a flattening or decline in production volumes — in short, it can take months or even years.

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In yesterday’s We Ain’t Seen Nothin’ Yet, we discussed how associated gas and liquids from U.S. crude production have driven much of the growth in gas and NGLs supply over the past half-decade or so, and how that dynamic will change in a post-COVID world. No doubt there’s much more volatility to come in the oil sector, and we’ll continue updating our fundamental and equity analysis here in the RBN blogosphere and at our upcoming Virtual School of Energy. Today, though, we turn our focus to how recent events, along with weather and storage fundamentals, are playing out in the Lower-48 natural gas market.

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