The “black swan”* coronavirus pandemic, says long-time natural gas analyst Andy Weissman, is profoundly upsetting U.S. and world energy markets, creating a recession much worse that the 2008 event. He says, “Price and supply/demand forecasts that were reasonable just a few weeks ago must now be scrapped.”
The hopes, often reflected in the White House, for a rapid, “V-shaped” economic recovery from the viral plague are “no longer realistic,” says Weissman. The U.S. and the globe “are likely to be mired in a recession for the remainder of this year and much of 2021.” The report cites a recent JP Morgan assessment, reversing earlier views, that most likely is a “vicious spiral twice as bad as the 2008 financial crisis.”
In a report from his firm, EBW Analytics Group, scheduled to be released April 21, Weissman says, “Most estimates of the decrease in US demand for natural gas and electricity resulting from the pandemic are much too low.” The timing and size of the decline are not certain.
Also, says the analysis, the pandemic “is not likely to end quickly,” and current social distancing will continue, despite the wishes of President Trump and other political leaders. To prevent recurrent outbreaks, “it is likely to be necessary to periodically re-impose socal distancing restrictions, disrupting the economy and reducing energy demand.” The risk of “a major outbreak next winter is substantial.”
The analysis notes that the U.S. response to the spread of the novel virus “has been slower than many other countries” and the delay “has taken its toll,” as the U.S. has emerged as No. 1 in confirmed infections and deaths in the world.
Weissman foresees “steep declines” in U.S. demand for natural gas and electricity and for LNG exports. The LNG export decline, he says, won’t come until the third quarter of 2020. U.S. consumption for gas and power is likely to be “below previously expected levels” for the rest of the year and for “all or most of next year.” The decline is gas production won’t likely peak until the fourth quarter or “the first few months of 2021.”
The gas decline will be driven by declines in the oil patch tight oil plays in the Permian, Bakken, Eagle Ford, Niobrara, and Anadarko basins. Associated gas from these wells, he notes, “has been the fastest growing source of new supply in the domestic market.”
The pandemic has come, Weissman says, “at a time when U.S. natural gas and electricity prices had already fallen to their lowest levels in decades.” Electricity prices have slumped “with weak fuel prices and significant declines in load.” In the Electric Reliability Council of Texas wholesale, competitive market, summer load forecasts “have slashed July and August futures prices” by 28%, or $39/MWh. Prices might recover in most competitive wholesale electricity markets by the winter and into 2021.
* “Black swan event” was originally coined by statistician and risk analyst Nassim Nicholas Taleb in 2007 to describe an unsuspected and surprising event. Black swans, on the other hand, are common in Australia and New Zealand.
— Kennedy Maize