Global oil and gas market update

1. The week in review
Price Point Weekly
Global oil and gas market update
24 August 2020
Andy Brogan
EY Global Oil & Gas Leader
+44 20 7951 7009
abrogan@uk.ey.com
Derek Leith
EY Global Oil & Gas
Tax Leader
+44 12 2465 3246
dleith@uk.ey.com
John Hartung
EY Americas Oil & Gas
SaT Leader
+1 713 751 2114
john.hartung@parthenon.com
Jeff Williams
EY Global Oil & Gas
Advisory Leader
+1 713 750 5916
jeff.williams@ey.com
Gary Donald
EY Global Oil & Gas
Assurance Leader
+44 20 7951 7518
gdonald@uk.ey.com
The week ahead
By this time next week, both US political parties will have held their presidential nominating conventions and the election season will have officially begun.
The promise of green energy was prominent at the Democratic convention and lighter-touch regulation of fossil fuel industries is likely to be a theme at the
Republican convention. While elections always matter, the forces driving oil and gas markets in the near term aren’t likely to be affected by anything anyone
says before November and the outcome is more likely to affect the long-term path of energy transition more than anything. To the extent that election
dynamics affect the near-term energy markets, confidence in one candidate or another’s ability to bring the spread of COVID-19 in the US under control and
their plans for economic recovery will be central.
Oil, natural gas and equity markets continue to look past the present moment. Economic news is mixed at best, with
continuing claims for unemployment benefits in the US falling gradually to just over 16 million from their peak of 24
million in May, but still eight times their pre-COVID level in mid-March. Crude oil futures prices continue to be stable,
but according to OPEC demand is recovering more slowly than expected, inventory drawdown lags, and oil-
producing countries are likely to be called on to defer plans to ramp up production. Some segments of oil demand
may take years to come back to normal. Following the initial shock, production discipline has been remarkable. The
need to sustain government budgets has been, and will be ever present and it remains unknow when or if cracks will
begin to appear in the wall. Natural gas markets continue to show strength. Demand was up 1.4 Bcf/d from the
previous week and LNG pipeline receipts increased by 6.8% and account for 21% of the overall increase in demand.
In the past three weeks September futures have increased by 53 cents per Mmbtu, in spite of storage balances
being well beyond the previous five-year range. Near-term downward pressures are apparent in the shape of the
forward curve. The spread between September 2020 and September 2021 futures is almost 50 cents while the
spread between December 2020 and December 2021 is negative.
Commodities
Oil 1%
Natural Gas 8%
Equities
IOC 2%
NA Independent -2%
Intl Independent -1%
OFS -1%
S&P 500 0%
Source: S&P CapitalIQ
US natural gas prices rise as supply-demand balance improves
• The US Henry Hub gas price has jumped 42% since 31 July, to
reach US$2.56/Mmbtu on 19 August. This is the highest level in
this year and up 16% annually.
• Declining natural gas production in the US coupled with an increase
in demand for LNG exports and from the industrial sector have
supported gas prices. E&P activity in the US has declined sharply,
with a ~70% drop in rig count (244 on 14 August) since January.
• According to the US EIA, growth in gas demand this winter
combined with continued drop in production could tighten the
markets further and cause prices to rise. At the time of this writing,
December 2020 and January 2020 gas futures are trading at
$3.14/MmBtu and $3.24/MmBtu respectively.
1.3
1.8
2.3
2.8
Jan Feb Ma
r
Apr Ma
y
Ju
n
Jul Au
g
Henry Hub (US$/bbl)
Source: US Energy Information Administration
*Approximately represents consumption of petroleum products
Note: August figures in the chart consider only data up to 14 August
0
2
4
6
8
10
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
US petroleum products supplied* (million b/d)
Jet fuel Distillate fuel oil Motor gasoline
Jet fuel demand faces a prolonged period of recovery
• Jet fuel is the worst-hit market in the COVID-19 crisis. While the demand for
gasoline and distillate fuel oil has nearly recovered from the lows in April, jet fuel
consumption in the US is still 40% below the January levels and passenger traffic
continues to remain low despite easing of restrictions. Travelers haven’t become
comfortable yet flying and there is no quick or easy way to change that.
• Partially because of slow recovery in jet fuel demand, oil forecasting agencies
have revisited their oil demand estimates until the end of 2021 – the IEA has cut
estimates for 3Q20 and 4Q20 by 500,000 b/d, projecting the consumption to
average 95.25 million b/d during the period. The IEA, US EIA and OPEC believe
that global oil demand will not recover to 2019 levels until 2022.
• Until a vaccine is widely available, weak air travel demand will continue to impact
demand. For now, the long-term demand outlook remains opaque. Human
behavior is complicated and difficult to predict.

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