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Energy Markets: Unprecedented Times – Making the Connection Between Commodities and Midstream

Investment Manager Research | Real Assets May 18, 2020

Most major markets have experienced unprecedented volatility thus far in 2020 and assets associated with the energy industry were punished the most. The industry experienced simultaneous supply and demand shocks and the magnitude of each resulting in an unprecedented time for the energy industry.

Energy Markets

Economics 101: Demand leads price, price leads supply
Demand is down and remains uncertain: As COVID-19 cases accelerated globally, economic activity came to a grinding halt, perhaps most evident in the energy industry. The International Energy Agency (IEA) forecasted a drop of 9.3 million barrels a day (mb/d) year over year from 2019. In April alone, the IEA estimated a 29 mb/d drop2. For context, the decline retraces April 2020 oil demand to levels last seen in 19951. These demand-side concerns were a primary driver of falling oil prices for the first two months of the year. Price volatility was exacerbated when the Organization of the Petroleum Exporting Countries (OPEC) and Russia failed to come to terms on a supply cut in early March.

U.S. Oil prices and COVID-19 Cases

Supply is up, and help is on the way: Rather than a rational and expected cut in global oil supply, the OPEC+ (OPEC and Russia) meeting in early March resulted in an increase in supply for April delivery. This sent energy markets into a tailspin causing a number of imbalances as global supply continued to grow, storage shortages became common and demand remained weak.

A clear indication of just how stark this imbalance of supply and demand became was when the May contract of West Texas Intermediate (WTI) futures traded at a negative price on April 20 as speculators fled for fear of actually taking delivery of physical oil without storage capacity. Cooler heads prevailed on April 12, when OPEC+ came to an agreement on a supply cut of 9.7 mb/d which began on May 1. This is the single largest supply cut out of OPEC+ since its formation in the 1960s1. When coupled with other coordinated efforts from the G20 and non-coordinated efforts from countries like the U.S. and Canada, the supply reductions should help stabilize prices.

Click here to read more of our white paper Energy Markets – Unprecedented Times

1Bloomberg
2International Energy Agency (IEA), https://www.iea.org/topics/covid-19

The information contained herein is confidential and may not be disseminated or distributed to any other person without the prior approval of DiMeo Schneider. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecasts represent future expectations and actual returns, volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is a possibility of a loss.

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