Like everything else in the world, energy markets are undergoing totally unprecedented convulsions. It seems as if everything that was working before COVID-19 is now broken, and an entirely new rulebook has been thrust upon us. Of course, it is impossible to know how crude oil, natural gas and NGL markets will play out over the next few weeks, much less in the coming years. But if we make a few reasonable assumptions, extrapolate from what we know so far, and crunch through a bit of fundamental analysis, it is possible to imagine what energy markets will look like after the worst of the coronavirus pandemic is behind us. One thing is for sure: things will not be anything like they were before. Where energy markets may be headed next is what we will conjure up in today’s blog.
From New Year’s Day to March 5, the price of Cushing WTI dropped by about $15/bbl, which was a wakeup call for the industry. But it didn’t really prepare folks for what happened next. Following the spectacular collapse of the OPEC-Plus coalition on March 6, WTI started free-falling: within a week (on March 13), it was down by another ~$15/bbl, to $31.73/bbl, and only five days after that (on March 18), it was off by another third, to $20.37/bbl. By then, the double-whammy demand hit from COVID and supply hit from increased Saudi and Russian production had really sunk in.
Either the coronavirus pandemic or the OPEC-Plus breakdown on its own would have been enough to bring energy markets to their knees. The combination of the two at exactly the same time may be as close to a knock-out blow as the energy industry has ever seen. Therefore, we are going to set March 6, the date of the OPEC-Plus failure, as the demarcation point between what the market was BEFORE and what it is becoming AFTER. The market’s perception of reality has changed radically in the past three weeks, and events have been unfolding at lightning speed: capital expenditure cuts, infrastructure project cancellations, a collapse in gasoline prices, refinery run cuts. And we’re only at the very start of the new energy world. We Ain’t Seen Nothin’ Yet.
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