Contributed By: Robbie Fraser, Senior Commodity Analyst and Balint Balasz, Commodity Analyst, Energy & Sustainability Services
[Live Update] Global Impacts of COVID-19 on Energy Markets + Open Q&A
Last month, Balint Balazs and Robbie Fraser — commodity analyst experts from Energy & Sustainability Services’ Global Research & Analytics team — delivered a live update on the global impacts of COVID-19 on crude oil and natural gas markets. More than 800 attended live and, not surprisingly, the volume of questions our audience submitted was more than our experts could accommodate during the hour.
Balint and Robbie agreed to revisit some of the most frequently asked questions in this two-part webinar follow-up. Part II of the series are questions with globally applicability. Part I includes questions focused on the U.S. and Europe.
Q. How will this affect the electricity prices, both short-term and long-term?
A. Compared to markets like crude oil, COVID’s impact on power markets has been much more regional. Power demand has generally been more resilient compared to the record drops for commodities like gasoline and diesel. Still, power demand, particularly from the industrial sector, is much lower than normal for this time of year.
Power prices are also being pressured by cheaper input fuel costs in many cases, with an oversupplied global LNG market reducing the cost of gas-fired generation. So, it’s certainly bearish in the short term. Over the long term, it’s a bit more nuanced. In the U.S., the ongoing drop in crude production is pulling natural gas production down along with it, and that’s helping 2021 prices to push higher, which would eventually feed into power costs.
Q: When the crisis ends, what speed do you expect demand and price to recover?
Demand is already recovering in most cases, but the question is whether the current trend continues. COVID-19 is likely to bring continued uncertainty. A sudden change in the number of new cases or the potential development of a vaccine are just a few examples of things that can significantly alter the economic recovery timeline.
Consensus among major economists like those at the IMF tend to see a return to pre-COVID economic conditions by mid/late 2021 if things stay on track. (Certain sectors and regions are likely positioned for an even quicker recovery.) Of course, the more pessimistic projections extend that recovery date out as late as 2024. Nonetheless, the data is starting to build a strong case that, at least in terms of lost demand, the lows were already set back in March/April.
Q. Is the Chinese industrial activity a V-shape?
Following a historically low reading in the Chinese Manufacturing PMI, as well as a 10% year-on-year plunge in power consumption during February, both the industrial outlook and energy demand have shown a significant rebound in the following months as the country came out of lockdown. While the direct and immediate effects of the pandemic may have receded as contingency measures have been broadly successful, the lingering risk of a second wave of infection, and now the reemerging tensions between the U.S. and China will cast doubt on a true V-shape recovery.
Q. Do you expect any paradigm shift caused by COVID-19 in consumption?
The rapid changes in individual, societal, and economic behaviors could result in demand shifts, even if we assume a best-case scenario where we can mostly avoid further lockdowns. The sudden increase in employees working from home may change demand levels, as well as rebalance the weekly load profiles, possibly narrowing the current difference between weekday and weekend consumption levels. When it comes to fuel demand, we mostly focus on the current unprecedented drops. However, ground traffic – and therefore consumption – may actually tick up further down the line as public transport becomes less safe and efficient with ongoing social distancing guidelines.
Watch the recording of the live webinar to get more insights on how market disruption is affecting global energy markets.