Slivers of Hope Shine Through Dire Industry Period

By Jeff Awalt, Executive Editor

Enough of the worst-case scenarios.  How about a little optimism, for a change?  Yes, it can be hard to find while dodging a falling sky, but a few industry analysts are beginning to suggest outcomes that land somewhere short of apocalypse.

Wood Mackenzie’s Ann-Louise Hittle, for one, suggests that recent teeth-gnashing forecasts for crude oil might have been overly pessimistic. 

And Anna Mikulska of Rice University’s Baker Institute predicts that global demand for natural gas may drive its price recovery independent of crude oil trends.

Oil Supply

Since U.S. President Donald Trump was alarmed enough to call for OPEC+ to reduce output, Hittle points out, Brent prices have increased from a low of $19 per barrel on March 27 to the low $30s per barrel as of Thursday.


“With mere talk of a reduction enough to spark such a price gain, we think the very extreme demand forecasts may be missing the mark. How could prices rise this much if demand is truly off 30 million barrels per day (bpd),” asks Hittle, vice president of Macro Oils at Wood Mackenzie.

Based on its product-by-product, week-by-week forecast, WoodMac projects that April will see the sharpest drop, with a year-on-year decline of over 15 million bpd as coronavirus containment measures are at their steepest. It expects global demand to fall over 8 MMbpd for the second quarter, compared with the same three-month period of 2019. 

As with all other forecasts, Hittle points to a challenging market that puts pressure on storage space and prices, but she expects containment shut-ins in place will be most severe during April, and will then ease slowly in the following several months. And its projections are a far cry from 30 MMbpd.

“This means Q2 2020 is the most challenging period for producers and the oil market. Demand is collapsing and supply is rising. But China is slowly ending its lockdown this month. Chinese demand is also starting to see a slower rate of year-on-year decline,” Hittle said. “By the northern summer we no longer expect the dramatic declines in demand. At the same time, non-OPEC production will be declining year-on-year by Q4 2020.”

The second half of 2020 will see a gradual easing of the extreme oversupply seen in the first half of this year as the fundamentals begin shifting towards demand stabilization, according to the Wood Mackenzie forecast. Demand will still be down, year-on-year, but the decline will not be as steep as in the second quarter, and supply will start to weaken.

“To show the extent of the trend, for 2021, Wood Mackenzie is forecasting total global supply, including OPEC, non-OPEC and natural gas liquids, to show no growth for year. Demand, while weak, is projected to rise in 2021 – a sharp reversal from 2020 when demand falls and supply rises,” Hittle said.

Summing up her views, Hittle said, “The crisis is extreme for the oil market, but low oil prices have already had an effect on supply, and the steep falls in demand will have a limited duration.”

Gas Demand Rebound

As the COVID-19 economic slowdown edges off, Mikulska envisions natural gas demand recovering, and possibly even increasing, as the attractiveness of low-priced gas may encourage China and other countries to switch from coal at a faster pace for power generation.

“If this situation happened 10 years ago, we wouldn't be even talking about the crisis in the natural gas trade because gas prices were set by oil. At that time, it was "whatever happens to oil happens to gas" as a secondary effect, and there were no surprises,” Mikulska told P&GJ.


“But the gas market evolved and became more liquid. It has become larger, with many more participants, and natural gas is being used more broadly,” she said. “We also now have a lot of LNG suppliers, new energy suppliers and natural gas producers and exporters bringing in gas from unconventional resources that are affected differently by the economics of oil.”

Mikulska, a nonresident fellow at Rice’s Baker Institute, believes the pandemic will affect natural gas only in the short term, noting the findings of a 2015 report produced for the U.S. Department of Energy by the institute’s Center for Energy Studies and Oxford Economics titled, “The Macroeconomic Impact of Increasing U.S. LNG Exports” on global supply and demand trends.

“There's this whole complicated picture of what happens to natural gas prices, and COVID-19 has become one of the elements that will impact them. The short-term price war in oil also will impact it, but differently than oil used to impact natural gas,” she said. “There are some remnants of the typical oil indexing that will still impact the actual pricing of natural gas. But in order to understand market trends in natural gas prices, we have to unpack all these factors.”

For instance, Mikulska says, low prices of gas can generate higher demand, citing China’s greater likelihood of replacing coal with gas for power generation when its costs are more competitive.  Low oil prices may have a greater direct impact on the extraction of natural gas than on its price, particularly in such areas as the Permian Basin with high rates of associated gas production. 

“With a decline in oil production due to low prices, this (associated) gas is not going to be developed. And if this occurs during the period of rising natural gas demand, it can actually bring prices in Henry Hub up,” Mikulska said. “So natural gas pricing is complicated in many ways.  It’s probably more complicated than oil.”

The wide range of factors affecting price encouraged Baker Institute researchers to develop the Rice World Gas Trade Model to simulate various alternative futures for the global natural gas market.  Their output data were then input into the Oxford Economics Global Economic Model and Global Industry Model to simulate broad macroeconomic and sectoral impacts in their 2015 study.

When the economy is not doing well, prices are stalled.  But there is really nothing apparent beyond the pandemic to stop the economic recovery,” Mikulska said.  “As it recovers, we will see energy demand rise and there might be additional switching to cheap gas to push out more coal generation – or, at least not build new coal generation in Asia, just as we saw in the United States.”

The 2015 report projected somewhat soft demand for natural gas worldwide until at least the mid-2020s.  “Despite these short-term effects we’re seeing now from Covid-19 and overproduction of oil, that schedule is still valid.”

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