May 7, 2020

COVID-19 and Crude Continue to Push Natural Gas Into Untested Territory

By Jeff Bolyard, VP, Commodity Strategy and Procurement

This article is adapted from Edison’s Monthly Monitor Report – May 2020, a comprehensive assessment and analysis for the natural gas, electric, and crude oil markets. To download the complete report, please click here.



Natural gas data showing the impact to demand from COVID-19 and the impact to associated supply from the crude oil war continues to trickle in. While these two issues are related to one another, based on how each plays out independently over the next several months to years will determine the impact on natural gas pricing.

For example, if COVID-19 demand destruction domestically rebounds over the next 6 months, but crude oil prices remain below what is profitable for most U.S. producers because international demand remains slow, associated gas produced from those oil wells will be removed from the market, placing bullish pressure on natural gas prices.

However, if COVID-19 demand has a slower return to normal levels over the next 12-18 months, and OPEC+ can figure out a way to reduce the currently oversupplied oil market, crude prices would rise, U.S. oil production would again increase, and the associated gas from those wells would place us right back into an oversupplied natural gas market and a very bearish gas price landscape.

What we can see at this point is that there is volatility in the gas market. The chart below shows the daily pricing of NYMEX over the past two months for the prompt futures contract vs. prompt contracts for the same months in 2019. The daily closing price variance (absolute) from March 5 to May 4 in 2019 averaged $0.032 from one day to the next. The same measurement over the past two months varied an average of $0.067 each day, more than double last year.

Shown in the chart below based on data from Baker Hughes, are new trends contributing to the volatility such as the decline in drilling rigs across the country. In the last seven weeks, total active drilling rig count has dropped nearly 50%. As expected, oil directed rigs have made up the majority with a loss of 358 rigs from 683 to 325 during that time. Also reduced, but not nearly as severe, is the consistent drop in gas directed rigs, which now stands at just 81 rigs compared to a recent high of 202 back in January 2019.

Absent a change that has yet to appear, the gas market could be setting up for a volatile year where gas production will decline over several months. Less clear in the future is the timing of demand recovery as states start opening up at different levels and speeds, or how long the now uncompetitive netbacks of U.S. LNG cargoes will remain. One such scenario could be seen where all those coincide just as winter demand arrives at the end of the year. Under such a scenario one could see the winter NYMEX strip of Nov2020 – Mar2021, which has risen $0.60 since March 1 and currently at $2.98, trading near the Polar Vortex winter of 2013-2014 when the winter season averaged $4.42.


If you have questions or concerns about the impact of the crude oil price war and COVID-19 on your current natural gas supply strategy, please reach out to your contacts at Edison Energy for a discussion or send us an email at