The collapse in global economic activity due to the coronavirus (COVID-19) pandemic has led to an unprecedented reduction in crude oil demand. With additional excess supply caused by the OPEC/Russia production quota battle saturating the market, oil prices have fallen to their lowest level in years and serious concerns exist regarding oil transportation and storage capacity if production volumes aren't reduced significantly and soon. Meanwhile, how are domestic natural gas prices holding up?

On the supply side, according to the U.S. Energy Information Agency, domestic natural gas production has recently begun to decline due to persistently low gas prices and a reduction in gas-directed drilling. Associated gas from unconventional oil drilling has continued to provide excess supply in certain basins, but that trend is expected to end due to the announced cuts in oil drillers' capital budgets. Last week, BTU Analytics released a paper than summarized their natural gas production outlook for 2020-21. Under all of their scenarios, natural gas production is expected to decline to less than 92 Bcf/d and potentially below 90 Bcf/d in 2021.

With respect to natural gas demand, the coronavirus slowdown doesn't seem to have yet had much effect. The most significant and immediate impact of the pandemic has been a reduction in transportation fuel consumption, but this accounts for relatively little natural gas consumption. Natural gas usage is concentrated in the industrial, residential, commercial and electric power sectors, and these aren't expected to be as greatly impacted by the current restrictions and guidance regarding movement. For example, the Texas electrical grid operator (Electric Reliability Council of Texas) reported that since March 22, Texas electricity usage has declined by only 2%.

(Source: Bloomberg)

The impact of a potential significant gas production decline in an oversupplied gas market plus a slight decrease in demand appears to be reflected in recent forward prices for natural gas. The curves above show the futures settlement prices for gas at Henry Hub at the beginning of the year, the end of February and last Friday. Although the front part of the curve has declined due to low demand from the previous warm winter, prices through the middle of the year are about 10% higher than they were a few weeks ago. A small move in the right direction, but we'll take it.

This article was published in the April 7, 2020 issue of the RED Weekly E&P Update Newsletter