Natural gas follows oil towards a collapse below zero

By Omar Shaban

Natural gas is expected to be the second commodity to suffer sale prices collapsing below zero, as happened with oil last April. The collapse in the gas market is expected to be sharper than in oil, because the gas market lacks the regulation and coordination found in the oil market.

Oil sale prices had seen a sharp collapse below zero last April, owing to the great fall in demand and the filling of storage caused by the corona crisis, which brought the world economy to a near-total halt. The world's large oil producers succeeded in overcoming the sharp collapse in oil prices by agreeing among themselves to ration production and reduce the supply in the market — which helped restore the price level to what it was before the collapse.

The world's natural-gas market amounts to 600 billion dollars. Despite the near-total halt of the world economy, the gas-producing states continued producing at the same rates — bringing the stored gas reserves in Europe and Britain, among the largest consuming markets, to 75%, compared with an average strategic storage of 45%, the safety threshold. The European reserve stores are expected to fill completely — 100% — in August/September, a period coinciding with the season of shrinking gas consumption. At that point the gas-producing states will find no one to buy from them. Several gas-consuming states, among them the United States and Malaysia, have actually cancelled shipments that were allocated for this summer. Russian gas supplies to Europe have seen a marked decline in recent months.

The gas-producing states are heading swiftly toward a harsh economic crisis unless they begin at once to reduce the quantities produced from their wells to preserve a balanced level between supply and demand. The budget deficit will deepen in the states that rely on gas sales as a principal source of revenue. Many infrastructure projects will stop; the budgets allocated to social services, education, health, and international assistance will be victims of this crisis. Spending on armament will fall — and that is good in itself.

Even if the world succeeds in curbing the spread of the corona pandemic, the repercussions of the corona crisis will remain for several years to come.