How Coronavirus is Affecting the Oil & Gas Industry
A great many things affect the price of oil and natural gas–weather, economic conditions, supply/demand balance, sunspots. Can a human virus affect the O&G industry too? It seems the answer to that is, YES. We’ve resisted bringing you blow-by-blow the daily coronavirus tripe peddled by mainstream media in their attempt to harm the American “Trump” economy. But we can’t ignore how media-generated panic is affecting world markets–and (now) the oil and gas industry, including the industry here in the U.S.
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More obsessing and hand-wringing over the low price of natural gas (we can’t help it!). Our favorite government agency, the U.S. Energy Information Administration (EIA) published a post on Friday that points out the NYMEX price of natural gas has hit its lowest level for a February day in the past 20 years, closing at $1.77/MMBtu on Feb. 10 (up slightly since then). EIA also points out these are the lowest absolute prices (for any day in any month) we’ve seen in the past four years–since the price crash of 2016. Again, the price crash is happening in February! Yuck.
Gasmageddon, as this current low natural gas price climate is being called, is getting worse. Based on the latest weather models (the natgas market has some of the best long-range weather forecasting in the world), gas prices have crashed and are burning (pun intended). Yesterday the NYMEX futures price closed at $1.77–in the dead of winter! Spot prices for gas bought and sold in the northeast lead the loss in value. A Raymond James survey of energy executives found most execs believe we will exit 2020 with the price of gas in the $1.50-$2.00 range, and that gas will not go above an average of $2.50 this year. Although we now use 50% more natgas than just 10 years ago, prices remain stubbornly low. Why?
If there’s any silver lining to the ongoing low price for natural gas (NYMEX price closed at $1.86 yesterday), it is that gas-fired power generation kicks in with more demand, which will ultimately cause the price to rise–or at least not fall any further. Electric generation is a critically important market for natural gas. We spotted a couple of interesting articles. The first, from Platts, outlines the relationship of low gas prices to more switching from coal to gas. Platts says if gas stays under $2/Mcf, “power burn could see significant upside risk.” The other article, from Rigzone, says natgas will generate nearly 40% of all electricity in 2020–double what it generated just 10 years ago.
According to our favorite government agency, the U.S. Energy Information Administration (EIA), the price of natural gas will, on average, remain below $4 per thousand cubic feet (Mcf) for (gasp)–the next 30 years. You read that right. Lower for longer is, according to EIA, the reality for the next full generation. EIA recently released its “Annual Energy Outlook 2020” (full copy below). In addition to low gas prices, EIA predicts that so-called renewables will eclipse natural gas in electricity production by 2050. We say: When pigs fly.
Natural gas is one of those commodities that economists consider as close to a “pure” commodity as one can get. Meaning the classic supply and demand curve rules. When you get more supply than you have in demand, the price goes down–along a predictable curve. In the natural gas world, supply signals come from a couple of different numbers. One is overall production. Another is storage–how much natural gas is sitting, unused, in underground storage, put there during summer “injection season” so it can be used during the winter “withdrawal season.” The bad news (for prices) is that with relatively mild temperatures this winter, we are at near-record high storage levels, according to the U.S. Energy Information Administration (EIA).
How many times over the years has MDN made this observation, using words along these lines: Cabot Oil & Gas is the only Marcellus drilling we know that can spin gold out of straw. Meaning they make money even at some of the lowest natural gas prices in the country, found in northeastern PA. A recent post by an energy investment advisor examines Cabot’s unique ability to make money at low prices.
Yes, 2019 was a tough year here in the Marcellus/Utica shale due to low natural gas prices drillers received for their gas. The U.S. Energy Information Administration says the average spot price for natural gas at the benchmark Henry Hub was $2.57 per million BTUs (MMBtu) in 2019. But the news gets worse. EIA says that in 2020, because of increasing natgas production without a corresponding increase in demand, they predict this year’s average HH price will sink to $2.33/MMBtu. That’s 9% lower this year than last.
Ever hear of something called the oil-to-gas price ratio? It’s a simple concept. You take the price at which oil is trading per barrel, and compare it to the price of natural gas trading per MMBtu (million BTUs). What can that ratio tell us about the natural gas market in general, and the Marcellus/Utica gas market in particular?
At the end of last year/beginning of this year we noticed several articles predicting what will happen with natural gas drilling in 2020. The upshot from the experts and prognosticators quoted is that drillers will “tap the breaks” and natural gas production will, at a minimum, stay flat through 2020. Perhaps even fall a bit.
Once upon a time in BSE (before shale era) if you were to chart the price of oil and the price of natural gas together on the same graph, the path/track was almost identical. When the price of oil went up (or down), so too did the price of gas. With the advent of shale in 2008/2009, tracking between the two has changed. It’s gone. The value of natural gas compared to the value of oil is now *much lower* than it was in BSE.
We often spot stories in the press about the price of natural gas for end-user customers going down. A utility here and a utility there will announce a rate reduction. Most of the time we don’t bring you those kinds of stories because they’re pretty common. However, we spotted a story that’s different. The Public Service Commission in West Virginia says natural gas utility companies that serve 91% of the gas customers in the state have filed requests to LOWER the rates they charge for their gas–thanks to abundant supplies of Marcellus Shale gas being extracted in the state.
While on the surface the liquefied natural gas (LNG) marketplace may seem simple and straightforward, when you dig down you’ll find it is complex. There are different kinds of contracts between those who sell the gas, those who liquefy and ship it, and those who buy it. The LNG marketplace is, with the entrance of the U.S., changing rapidly. Our friends at RBN Energy recently posted an explanation for how it all works.