U.S. Crude Oil Catches COVID-19

Article by Commodities Management Group

U.S. crude oil was vaporized in Monday’s trading on the NYMEX. Prompt-month May WTI traded as low as -$40.32 per barrel (note the minus sign in front of that price). After trading down overnight in the Asian markets, crude for May delivery opened trading on Monday morning around $17 per barrel and never looked back. At one point, intra-day prices (Monday, April 20) were off more than 300% in what was the worst day in the history of the oil market. This is the first time prices have ever gone negative and the first time a contract has ever lost more than 100% of value in a session, let alone 300%.

What are Constellation’s Takeaways from this Market Event?

First, the oil market quickly veered into irrational territory. As noted in our market commentary a few weeks ago, market behavior is typically rational but every so often becomes irrational due to a distortion in the marketplace. Yesterday, that distortion was caused by a lack of places to store oil, and the price action was indicative of people shedding their responsibility to take delivery of oil at any cost.

Second, the market worked. However irrational, prices reflected the marketplace’s assessment of risk and provided one with the ability to trade based on that assessment. Certainly this was a painful event for some, and as information becomes available in the days ahead, we’ll find out who was subject to the most pain. But for every seller of crude at a price in the negatives, there was a buyer being paid to take delivery, meaning someone “bought” oil today and will be paid $40.32 for every barrel they purchased at that price.

The BIG Takeaway from the Day – Natural Gas

While this is a major story in oil, the big takeaway for our gas and power customers is that natural gas is up. May is $1.93, up nearly 20 cents per MMBtu, June is up 15 cents at $2.03, and January broke $3 per MMBtu.

Constellation’s Commodities Management Group (CMG) team has discussed the relationship between oil and natural gas for quite some time. The notion that very low crude oil prices are supportive of and a bullish factor for the direction of natural gas prices should not be a new concept for Constellation customers. The collapse in prices yesterday and today means that drilling for oil is going to fall dramatically, more than what has happened in the last six weeks, and the natural gas that comes from the process of drilling for oil (i.e., the associated gas) is going to decline, and very likely much faster and much deeper than what was forecast just two weeks ago.

drilling for oil is going to fall dramatically…and the natural gas that comes from the process of drilling for oil is going to decline…

While natural gas production is going to fall, demand for natural gas is, all things considered, surprisingly strong. Remember, natural gas is much more resistant to the shutdown caused by the virus than crude oil. For the week ending this past Friday, demand for natural gas in the industrial sector was flat at 20.8 Bcf per day (that’s pretty remarkable in the teeth of an economic shut down). Residential and commercial demand was up due to colder temperatures in the northern half of the U.S. liquefied natural gas (LNG) exports remain strong at more than 8 Bcf per day and exports to Mexico are strong at 4.6 Bcf per day. Power generation demand was flat last week – overall, a fairly strong demand performance. Also, there is plenty of available capacity to store natural gas over the coming months – a key difference relative to oil. With a $1 spread between the prompt-month gas contract and January, it pays to store gas. Concerns about future supply, the relatively solid demand picture and availability of storage are what keeps gas prices from going the way of oil prices.

To stay updated on these topics and more, join us for our next Energy Market Intel Webinar on April 22, 2020 at 2 p.m.ET. In April’s webinar, Constellation market analysts will continue to monitor the impact of the coronavirus pandemic’s impact on the economy and the energy industry, such as the natural gas and power markets.