GLJ’s July Pricing – Energy oversupply in a pandemic roiled world

As we continue to observe and experience the effects of the current pandemic, the energy industry, like the rest of the world, has begun what appears to be a slow recovery. In contrast to the governments that continue to spend to keep their economies afloat, energy producers are continually forced to cut spending to survive these downturns. With these cutbacks come production declines and shut-ins which are anticipated to slowly alleviate the global oversupply of both oil and natural gas; but when the supply-demand balance returns, the global energy landscape will have undoubtedly changed once again.

OIL DEMAND DESTRUCTION AND SHUT-INS

US shut-ins have topped 2.2 million bbl/d while Canadian shut-ins are estimated around 1.2 million bbl/d – including maintenance rescheduling. Add to this OPEC+ cuts of 9.7 million bbl/d through July and 7.7 million bbl/d through the end of 2020, continuing thereafter for 16 months at 5.8 million bbl/d resulting in an anticipated undersupply situation to alleviate the current glut. When comparing these production cuts and shut-ins to the demand destruction from the pandemic estimated at 6.7 million bbl/d for Q3, there is a path towards the market re-balancing and a resurgence of oil prices.

One major variable that has the potential to shake up the recovery for energy markets is a second wave of COVID and another round of associated lockdowns which would start another cycle of reduced demand. Regardless of a second wave, the market in North America has become much harder to navigate for oil and gas producers with capital availability becoming harder and harder to find. Many analysts are now estimating that US oil will not reach production levels seen at the start of 2020 for years – if ever again.

NATURAL GAS OVERSUPPLY

Natural Gas has not been spared by the impacts of the pandemic – in fact, there are many parallels that can be drawn between current oil and gas market fundamentals. Gas supply levels are at record highs due to most of the US and Europe experiencing mild winters after large storage builds in the fall last year. Add demand impacts of the pandemic and the current oversupply situation throughout both the US and European markets is unprecedented.

European gas prices have been especially hard hit due to record high storage levels, effectively backing off all demand for LNG imports coming from the US – eroding demand for US gas in an already flooded market. This shift towards worldwide fundamentals is a relatively new phenomenon seen in natural gas markets in North America and is anticipated to continue as LNG shipments have connected continental markets like never before.

BALANCE IN THE DISTANCE

There is optimism that with the slowdown of North American oil drilling, there will be a natural decline of both oil and associated natural gas production (~40% of North American gas production is associated gas from oil wells). With the reduced drilling and resulting production decline coupled with global production cuts, supply-demand fundamentals are anticipated to become more aligned around mid-2021, bringing both oil and gas prices out of the relative lows experienced recently.

GLJ’S JULY 2020 FORECAST

GLJ’s recently released July price forecast has WTI and Edmonton Light long-term prices of 55.00 USD/bbl and 68.75 CAD/bbl, respectively (in real 2020 dollars), with Henry Hub and AECO long-term forecasts at 2.75 USD/MMBtu and 2.48 CAD/MMBtu, respectively (in real 2020 dollars).