Coronavirus: The “Black Swan” Event that has Disrupted Energy Markets & the Economy

Article by Commodities Management Group

In Constellation’s March Market Intel Webinar, our chief economist and market analysts examined events of the past month relative to how coronavirus is affecting and may affect the natural gas and power markets. The term “Black Swan” refers to Nassim Nicholas Taleb’s popular book that explores events that have a low probability or predictability but have high consequences. The last Black Swan event was the financial crises of 2008/2009. It appears that coronavirus is the latest Black Swan.

During the webinar, Constellation’s Commodities Management Group (CMG) discussed data and analytics related to the energy demand shock brought about by the spread of coronavirus domestically and globally. Air travel is down drastically over the past 60 days, and that trend has accelerated over the past week as states and the federal government have moved to shut down whole sectors of economic activity in order to halt the spread of coronavirus. The federal government and numerous governors have shut down bars, restaurants, gyms, concerts, sporting events and gatherings of more than a few people. Additionally, most companies have stopped events, severely curtailed travel and moved their workforces out of central locations to work-at-home solutions. These actions are having a profound effect on the demand for energy as economic activity is grinding to a halt or has been severely curtailed at home and abroad.

Oil Price War between Saudis and Russia

The coronavirus originated in China late in the fourth quarter of last year and disrupted China’s economy driving oil demand in Asia down by approximately 4 million barrels per day. Falling global demand for oil in Asia placed downward pressure on crude oil in what was already an oversupplied market. Since 2016, the Organization of the Petroleum Exporting Countries (OPEC), led by its largest producer, Saudi Arabia, had partnered with Russia, the world’s second largest oil producer, in an effort to curb production to support oil prices. That partnership fell apart on March 9 when Russia announced that it would not make cuts to oil production in cooperation with plans announced by Saudi Arabia for an additional 1.5 million barrels per day in the teeth of a flagging oil market.

Oil prices collapsed 25%, the single largest daily dollar-per-barrel decline since the 1991 Gulf War. The collapse of the global crude oil market occurred at the same time that coronavirus escalated in Europe and the United States combined, for a severe blow to equities, commodities, and nearly every asset class. U.S. stocks have lost 30% of their value over the past ten days.

Potential for Curtailed Production, Oil and Gas Demand

In our February Webinar, we discussed the effects of low crude oil, natural gas liquids, and natural gas prices on the producers of those products, noting that prices for all hydrocarbons were at multi-year lows and in some cases, all-time lows. Low prices have been forcing producers to cut capital expenditures, sell assets, abandon projects and reduce borrowing. Since last month, crude oil has fallen $25 per barrel, an amount equal to $109 billion on an annualized basis.

To put this into some perspective; in a single month the oil market shed an amount of annual revenue equal to nearly one and a half the times the total annual revenue of the U.S. wholesale natural gas industry (i.e., approximately $68 billion per year at current production and current price). Domestic natural gas and oil producers cannot make sufficient returns on invested capital at the current low-price levels. Most forecasters (note: Constellation does not “forecast” energy prices) have now pivoted their view to one where production of oil and gas will fall in 2020 in response to very low prices coupled with near-term demand being curtailed.

What’s Next?

Our CMG team has been talking about the potential for low oil prices to actually support natural gas prices in the mid- and longer term as producers would need to cut spending, resulting in falling production. In fact, the scenario for low oil prices potentially supporting the natural gas market accelerated at a rapid pace during the past week. However, the coronavirus presents the potential for lower demand not just for oil and refined petroleum such as jet fuel and gasoline but also for reduced demand for natural gas as well. The question for all of us centers on the severity and duration of the current crises.

China appears to be “turning back on.” Many sources are reporting that Chinese factories are ramping up and this is corroborated by satellite imagery and reports by various news agencies. South Korea seems to have blunted the number of cases of coronavirus, according to Reuters, and achieved a downward trend in infections, raising hopes that Asia’s largest epidemic outside of China may be abating. The good news from China and South Korea has been outweighed in Italy, a global hotspot for coronavirus, where the death toll appears to still be rising. The broader question for the next two or three months is: “Is the U.S. on a trajectory similar to South Korea, or Italy?”

We will continue to closely monitor the situation and evaluate additional measures to support our customers and communities as needs arise. We wish everyone safety and health as we all navigate these challenging times. 

To stay updated on these topics and more, join us in April for our next Energy Market Intel Webinar on April 22, 2020, at 2:00 p.m. ET. In next month’s webinar, we will review current economic conditions in light of impact of COVID-19, current gas and power market fundamentals, as well as provide attendees with a summer 2020 weather outlook update