Both oil and natural gas prices have underperformed as energy demand has tumbled. The theory of “shelter in place” does not lead itself to energy use. People are not driving, companies are not using electricity or air conditioning, and airlines and cruise lines are not using jet fuel or residual oil. In addition to the huge drop in demand, Saudi Arabia decided to start an oil price war, targeting Russia, and also the United States. The-Saudi’s announced a price decrease in conjunction with a rise in the volume of oil produced. This came at the worst possible time for oil bulls, creating a double whammy that hammered the price of oil.
How Has Oil Performed?
Oil prices have been hammered in 2020, dropping from $60 per barrel to a low of $19.27. Prices have rebounded to a higher of $29, before settling in near $26 per barrel. While the supply shock to commodity trading was the straw that broke the camel back, its demand that is the real issue.
The demand is very weak. In the United States, retail sales of gasoline are down a robust 46%, according to OPIS. Government data shows this is the least amount of gasoline supplied to the market since 1994. In Italy and Spain retail sales of gasoline are down a solid 85%. In California, the largest state in the US, gasoline demand in urban areas is down 60%. Diesel demand has fared better than gasoline demand declining by approximately 35%.
The supply side of the equation is also an issue but it won’t solve the problem if it is rectified on its own. Saudi Arabia picked a fight with Russia, following a failed attempt to increase output cuts in early March. The issue for Russia is they want countries that previously did not participate in an output cut to be part of the deal. The Kremlin announced that any deal would require the participation of countries that had not previously taken part in any coordinated cuts with a reference to the US. In the last year, the US has increased output by 1-million barrels per day. At 13.1-million barrels a day, the US is one of the largest producers in the world. Russia does not want to see the US taking market share and believe they should be part of any deal to cut output.
How Has Natural Gas Performed
Natural gas prices have also underperformed as the spread of the coronavirus made its way around the globe. Natural gas prices fell 32% from 2.2 to 1.50 per MMBtu in 2020. Prices hit fresh all-time lows as demand has declined. Power demand from corporations has declined rapidly, but the real issue for natural gas is supply volumes. Commercial demand has declined but plenty of the natural demand is residential which should remain intact. The US supplies more natural gas than it needs and exports gas in the form of liquid natural gas (LNG). A pullback in the supply of natural gas supplies will help buoy prices as the demand remains stable. This process can occur if oil rigs are removed in the US due to low oil prices. This will also impact natural gas production which occurs from these oil rigs.
Key Take Away
The bottom line is that demand has been one of the catalysts that have reduced the price of oil and will continue to weigh on prices until transportation recovers. Natural gas demand has declined but, the issues are more about overproduction. There can be a bullish case made for natural gas prices as production begins to halt due to the removal of oil rigs that also produce natural gas.