Financial markets attempted to buoy benchmark prices as oil and gas markets became volatile in Q1 2020. This created a disconnect in the price spreads between the NYMEX WTI futures benchmark and regional spot prices. The disconnect continued to grow at the beginning of the year until it reached a tipping point in April when prices plunged. Ultimately supply and demand at the regional level through purchasers like storage companies, airlines, and refineries will be what control the true value of crude prices and bring the market back into equilibrium.
The dual black swan events of the COVID-19 pandemic and oil price war have created a unique analytical opportunity within petroleum products. As oil prices crashed, natural gas prices have largely remained unchanged due to the markets in which the commodities are used. Transportation which is the main use of oil has almost entirely stopped, whereas electricity generation and heating, the destination for most natural gases has remained similar to pre-2020 levels. Such modifications to consumption caused markets to go haywire and commodity prices to crash. With crude production cuts now occurring at a faster pace than anticipated and states lifting restrictions, supply and demand dynamics for liquids compared to natural gas has changed since April. As the United States begins returning to normal, an update to these commodity market assumptions is in order.