Much about the world’s current state of affairs is abnormal, with the market’s response – or lack thereof – to cheap oil and natural gas a glaring example.
“Normally, you would expect to see some uptick in demand with low oil and gas prices,” Nikki Kantelis, assistant professor of practice, energy commerce at Texas Tech University’s Jerry S. Rawls College of Business, commented earlier this week. “A big uptick in demand requires sustained low prices for structural and behavioral changes. This time, COVID-19 has destroyed demand – demand for travel, demand for manufacturing, demand at the retail level, etc. – which outweighs typical responses to price signals.”
When might some semblance of “normalcy” return?
“Markets hate uncertainty, and we should expect oil and gas prices to continue to be volatile until re-establish some normalcy,” Kantelis remarked. “Unfortunately, none of us knows when that is likely to happen.”
In a recent conversation with Rigzone, Kantelis pointed out that a more familiar demand response to low oil and gas prices will not materialize until the economy recovers from work, travel and other restrictions tied to COVID-19 control and prevention.
She added that, in her view, the rebound from the recession will be somewhat gradual.
“I personally think the recovery in demand is more likely a ‘U-shape,’ rather than a ‘V-shape,’ because the longer the ‘stay-at-home’ guidelines are in place, the higher the risk of some permanent business closures, the longer the unemployment impact and the more drastic the impact on consumer sentiment,” Kantelis said. “Since roughly three-fourths of our economy is based on consumer spending, there is a worry that the recovery on the back end may not be back to the levels seen prior to COVID-19 due to possible long-lasting changes to consumer behavior.”
Kantelis pointed out that timing is key.
“The sooner the risk of COVID-19 is reduced via therapeutics or vaccines, the less likely it is that consumer behavior will be permanently altered,” she said.
Kantelis also pointed out that, although the downturn is apparent across the oil and gas value chain, it should be most transformative for the upstream sector. She added that the looming upstream transformation will be driven not by technology – as was the case with the “shale revolution” – but by financial wherewithal. In effect, the firms carrying less onerous debt loads stand a better chance of surviving the downturn.
“(T)he players will likely change because some E&P companies that are highly leveraged … will be liquidated, or absorbed by better-capitalized firms, the end result being fewer players,” Kantelis explained. “In the long-run that shouldn’t affect production, in the absence of a new technology and provided there is a return to more sustainable prices. The geology and technology remain, but with a likely different set of players.”
For the midstream, the pending E&P transformation will translate into fewer, larger and better-capitalized shippers who will be better-positioned to negotiate favorable throughput and storage deals, she predicted.
“Refining and retail sectors would both be affected by changes previously described in consumer behavior,” Kantelis said. “If we were to see a U-shaped recovery to lower demand levels, we could see a reduction in refining capacity as well as a decrease in retail outlets.”
To contact the author, email mveazey@rigzone.com.
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