Assessing the economic fall out from the COVID-19 pandemic for oil, natural gas and LNG
May 30, 2020
By Etienne Romsom & Kathryn McPhail, May 2020
This paper has been written in response to questions how the COVID-19 pandemic will affect the oil and gas globally, both in the short-term (2020/2021), as well as any systemic impact that will have long lasting implications for oil, natural gas and LNG.
This paper has been written in response to questions how the COVID-19 pandemic will affect the oil and gas globally, both in the short-term (2020/2021), as well as any systemic impact that will have long lasting implications for oil, natural gas and LNG. At the time this paper was written, the world is experiencing a plateau rate of an average 80,000 new COVID-19 cases daily (Source: John Hopkins University). Countries are in different phases in the pandemic and key concern has been expressed for a potential ‘second wave’ during the fall season in the northern hemisphere later this year. Some of the major economies, US, China and in the EU are preparing to ‘open up’ gradually, but it is yet unclear what the impact will be of restarting these economies on the COVID-10 transmission rate.
In essence, the long investment cycles of oil and gas opportunities do not align well with high price volatility unless investments are protected by long term contracts. Such contracts are absent in oil and quickly receding in LNG. There are no market makers in oil and gas, only market breakers. Both oil and gas industry lack capable parties to balance the market unilaterally. Strategic storage of oil and LNG could be mechanisms to manage extreme demand or supply shocks, but an economic / commercial model is currently lacking. Furthermore, such mechanisms could become the target of market actors that aim to take profit from the managed reduction of risk by continuing or exacerbating ‘bad behaviours’.
Figure 1: Global oil and gas pricing trends show a marked disconnect between JCC (Japan Crude Cocktail) prices and NE Asian spot LNG since early 2019. Source: IGU
SHORT TERM IMPACT FROM COVID-19
Figure 2: Global oil prices during February – April 2020. Source: Source: oilprice.com.
Figure 3: Negative oil prices for WTI futures on April 20th, 2020. Source: Reuters.
Figure 4: In April 2020, gas prices reached global parity at $2/MMBtu at key gas hubs across the world. Source: oilprice.com.
LONG TERM IMPACT FROM COVID-19
The longer-term economic and energy impact from the COVID-19 pandemic are strongly dependent on its duration and the severity of measures taken. One thing is clear, the energy markets are insufficiently robust against major supply and demand disruptions. COVID-19 caused demand destruction for oil and gas markets that were both already out of balance due to oversupply. Furthermore, COVID-19 came on top of Saudi Arabia’s and Russia’s newly instigated price war for market share and they had to quickly retreat from these endeavors to avoid a fatal blow to the global oil market that would have caused long-term structural damage. In gas, there already was an oversupply, particularly from newly added LNG supply capacity that aimed to take advantage of a price gap between US and Asian markets. By the time these large LNG capacity additions came on stream in 2018 and 2019, the price opportunity had disappeared. A significant share of this capacity had not been secured with long-term offtake agreements and many cargoes are now seeking markets at rock-bottom prices that are unsustainable. The long investment cycles of oil and gas opportunities do not align well with high price volatility unless investments are protected by long term contracts. Such contracts are absent in oil and quickly receding in LNG. There are no market makers in oil and gas, only market breakers. Both oil and gas industries lack capable parties to balance the market unilaterally. Strategic storage of oil and LNG could be mechanisms to manage extreme demand or supply shocks, but an economic / commercial model is currently lacking. Furthermore, such mechanisms could become the target of market actors that aim to take profit from the managed reduction of risk by continuing or exacerbating ‘bad behaviours’. Lastly, on the demand side, the IEA expects the slump in energy demand to be far greater and more lasting than the impact of the financial crisis. Questions are already being raised about whether the IMF’s latest forecasts for the global economy – described as ‘grim’, are too optimistic for almost 30 countries where fuel exports represent 40% of total exports . This is due to the long-term impact of the dual shock on indebted oil-rich countries, on high cost producers, lack of economic diversification, etc.
SkyTruth image of global flaring sites on 1 January 2020:
SkyTruth image of global flaring sites on 30 June 2020:
Sources: Tudor Pickering Holt & CO Weekend Digest May 1, 2020, Google Earth, SkyTruth.org
There are strong market signals that COVID-19 significantly reduced gas flaring in the US, as shut-in oil production primarily targeted remote areas with limited oil storage facilities and other (gas) infrastructure. Large oil production reductions have also been recorded in Russia, coinciding with a reduction in gas flaring, as OPEC+ production reduction agreement took effect.
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 Source: IEA Gas 2019, https://www.iea.org/reports/market-report-series-gas-2019
 Cheniere’s LNG pricing model is based on Henry Hub gas prices (2019 range $2.10 to $2.70, average $2.53/MMBtu) x 1.15 cost factor + tolling fee ($2.50 to $3.00) / MMBtu
 This is a measure of the weight of oil prices in the determination of LNG prices.
 International Gas Union (IGU) 2020 World LNG Report
 In comparison, the largest historic decline in annual oil volume demand was 2.6 mbpd during the slump in 1980. During the great recession, the total decline was 1.4 mbpd in 2009, two years after the 2007 peak (Source: BP Statistical Review of World Energy). See also: Annual global crude IEA Oil Market Report - April 2020; https://www.iea.org/reports/oil-market-report-april-2020
 310,00 bpd shut in of Canadian crude has been announced so far (~60% oil-sands). A western Canadian shut-in number in excess of 25% could be necessary (>1.1 mbpd) to match reduced downstream utilization.
 Source: S&P Global Platts analysis: https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/043020-us-oil-gas-rig-count-falls-59-to-432-as-oil-collapse-extends
 Rystad Energy “US fracking set for the biggest monthly decline in history as oil prices collapse and Covid-19 persists”, 22 April 2020; https://www.rystadenergy.com/newsevents/news/press-releases/us-fracking-set-for-the-biggest-monthly-decline-in-history-as-oil-prices-collapse-and-covid-19-persists/
 Andrew Bauer and David Mihalyi “How Oil-Dependent countries can respond to Coronoavirus and the Oil Crash”, IMF Public Financial Management Blog, April 20, 2020
 Oil & Gas Journal “Global LNG demand resilient in face of COVID-19”, 30 April 2020. https://www.ogj.com/general-interest/economics-markets/article/14175076/global-lng-demand-resilient-in-face-of-covid19
 The Oxford Institute for Energy Studies: “A Comparative History of Oil and Gas Markets and Prices: is 2020 just an extreme cyclical event or an acceleration of the energy transition?”, April 2020.
 See footnote 6
 World Economic Outlook, IMF, April 2020
 Andrew Bauer and David Mihalyi “IMF optimism and oil-dependent countries: be wary of sunny projections” The Africa Report, April 21, 2020
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