Negative Gas Prices? It’s a Very Real Possibility
It’s been a little over a month now since oil markets shocked the world.
In late April, oil futures contracts dipped into the negative. A spectacular implosion that meant oil suppliers would pay you to take their oil.
It was as bizarre as it was troubling.
A scenario that proved just how damaging this pandemic has been for energy demand.
Today though, oil has made a modest recovery. Or, at the very least, it has found a little stability.
Prices are still well below their pre-COVID levels, but at least they’re not negative.
However, the same can’t be said for natural gas.
As Reuters reported at the end of last week, gas prices in Europe are in trouble. And there is a possibility we may see the market follow the exact same fall as oil…
Just as we saw with oil, the problem lies in demand.
Both British and Dutch gas prices are tanking as demand evaporates. A result of lockdowns and ever–improving renewables output.
If things stay the way they are, the gas market is set for a huge glut. As Reuters notes:
‘Some traders are expecting European gas contracts for near-term delivery to go to zero or even turn negative – which could force sellers to give gas away – following a similar move in the West Texas Intermediate (WTI) oil price last month.’
That is a scary prospect indeed. And, if it comes to pass, will be yet another obstacle for markets to grapple with.
Plus, there is a precedent for negative gas prices.
Unlike oil, we have seen the market dip into the red previously. Meaning, it wouldn’t be surprising if it did happen again.
Not that that will make it any less disastrous.
The implications for gas producers are dire. Because even if some producers wanted to close down their gas fields, the cost will still be great. Decommissioning isn’t an easy or simple process.
With the world’s largest gas producer — Qatar Petroleum — refusing to ease up on production too, the outlook is grim. Unless demand picks up soon, gas producers may be in for a whole lot of pain.
What does this mean for Aussie gas producers?
For local players in the sector, such as Woodside Petroleum Ltd [ASX:WPL], this is no doubt a concern.
While the problem is largely isolated to Europe for now, there is a chance it could spread. We could end up seeing a huge, global glut of gas. A scenario that would impact producers like Woodside.
It will all depend on how long it takes for demand to recover.
If the oil market is anything to go by, it may be a while.
So, for investors it’s yet another reason to be cautious. Another sign as to just how far-reaching and lasting the economic impact of this pandemic may be.
For this reason, it is crucial that you protect yourself and your wealth.
That’s why Jim Rickards insists that now is the time to build a ‘Financial Pandemic Shelter’. A strategy to protect your money from being wiped out by market uncertainty.
To learn more about how to defend your capital, check out the full report here.
It just might save you from a lot of financial pain.
As for gas producers though, it may be too little too late.
For The Daily Reckoning Australia