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 I includes questions focused on specific geographies. In this case, the U.S. and Europe. The questions in part II of the series are all globally applicable.
Q. Are you envisaging any security of supply issues in Europe, i.e. blackouts?
A. The sudden drop in power demand brought about by lockdowns can be challenging for grid operators. The net reduction in power consumption has lifted the relative share of wind/solar/hydro sources in the generation stack, as renewables are generally first in the merit order due to their low short-run marginal cost. This requires careful and flexible residual load management by transmission operators. In some cases, even nuclear capacity will be called on to reduce load, such as we have seen recently in the UK.
In addition, factory closures have taken away a useful balancing tool: big industrial consumers generally act as buffers on the market through flexible demand response and their onsite power generation or storage capacity. In any case, we have not seen major blackout events so far. The ease in lockdown measures and the rising outlook for consumption will likely alleviate these concerns going forward.
Q. Given the volatility and uncertainty at present, what are the short-term drivers in European markets we should be aware of?
A. The single most important driver for European energy markets will be demand, followed by potential supply issues related to grid balancing. While natural gas is relatively easy to store, this cannot be said about electricity. Therefore, power prices may see a strong rebound as soon as markets perceive an upturn in industrial and economic activity.
Q. Do you feel UK electricity wholesale prices will continue to fall in the coming months?
A. The UK has just announced an upcoming ease in its lock down policy. This likely lifts the demand outlook and forward prices, as well, for now. However, market direction will still depend on two key factors:
- A potential second wave of infections may force the government to reintroduce emergency measures.
- We do not know yet how fast energy consumption levels will return to normal, if they ever do. We could very well see consistently lower electricity prices in the UK even after the lockdown if individual consumer behaviors change, employees continue to work from home, or big industrial users reduce their consumption.
Watch the full recording of our recent webinar:
Q. How long before crude storage fills up? Is all, or a portion of that, for the national strategic storage buy that has been in the news?
A. The U.S. government has opened some space in the strategic reserve for private companies to store oil, but that doesn’t solve the bigger issue of storage rapidly filling up and testing capacity limits. (It should also be noted that leasing that space is not the same thing as the U.S. government purchasing the oil).
Without major supply or demand changes, the U.S. risks running out of storage space in the next few weeks, while global storage could hit capacity in June. However, we’re likely to see producers forced to significantly curtail production in the effort to avoid that scenario.
Q. What is the marginal operation cost for oil production in the U.S. that below which, the U.S. oil would stall?
A. Given that U.S. crude production is down roughly 1 million barrels per day since COVID-19 first started to significantly impact prices, it’s clear we’ve already reached that point. Breakeven and operational costs vary significantly across the U.S., but typically shale producers need $40-60/bbl to drill a new well, and roughly $20-30/bbl to justify continued output from existing wells. Because shale oil wells have strong initial production declines — meaning daily production levels peak on day one before steadily dropping — simply maintaining existing wells would still result in production declines in the months ahead.