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The 2020 oil price crash: How does it compare to previous events?

James Brabben James Brabben Wholesale Manager
24th March 2020

This feature is part of our new Energy Market Watch coverage where each week we will provide insights and analysis on the latest trends in commodity markets, grid balancing and market fundamentals as the impacts of COVID-19 continue to emerge. You can sign up for the regular free update here.

Brent crude oil prices fell to a 17-year low of below $26/bl on 18 March 2020, following the impacts of COVID-19 on global demand and oil price disputes between Russia and Saudi Arabia. The recent crash saw prices record the biggest daily loss since the end of the Gulf war in 1991. In this Energy Market Watch Analysis, we assess how the crash has impacted on power and gas prices in 2020 so far and how this compares with two other historic price falls, the 2008 financial crisis and the 2014-16 oil price crash.

The 2008 global financial crisis

The global financial crisis (GFC) in 2008 wreaked havoc on financial markets and eventually the oil market. Brent crude prices had risen to an all-time high of over $140/bl before oversupply and suffering global economy saw the commodity crash to below $20/bl by the end of the year. This is reflected in gas and power prices, which saw the greatest movements following the collapse of Lehman Brothers (September 2008) and the subsequent bailing out of the American economy. Over the period oil dropped by 73.7%, with gas and power following slightly lower with 72.3% and 67.7% falls.

 

2014-16 oil price crash

Similar to 2020, though still unique to the current situation, was the oil price crash in 2014/15 as a result of a price dispute between the US and Saudi Arabia. Since the GFC in 2008, Brent crude oil prices had risen back above $100/bl in 2012 and remained there in 2014, which had also seen gas and power prices rise. Similarly to 2008, the price crash lasting nearly two years saw GB power and gas prices fall to fresh six year lows when oil prices eventually troughed in early 2016. Over the period oil dropped by 75.8%, with gas and power following lower with 59.0% and 41.6% falls.

 

2020 pandemic – how low can prices go?

So, can these previous crashes teach us anything about the 2020 trends?

The chart below compares the three oil crashes in the first 100 day period from when prices started to decline from their peak. While the 2014-2016 price crash occurred over a long period of time and much slower than the current one, the rate at which oil prices initially fell since the start of the year was comparable to the rate at which they fell in 2008. Where the two rates begin to diverge is when prices crashed due to conflict over output cuts between Russia and Saudi Arabia; meaning that prices fell to half their initial value about 30 days quicker than in 2008.

So far in 2020, Brent crude oil prices had fallen more than 60% since peaking at $69.75/bl in January when they hit a 17-year low of $26.33/bl on 19 March. Gas and power contracts have thus far followed the trend, falling 32.7% and 21.1% respectively. The rapid rate of decline of these prices has had a clear influence on season ahead gas and power as seen from the chart above, where seasonal prices for GB gas and power have also been in freefall since the turn of the year. It is worth noting that these seasonal prices did not react to the significant drop in oil seen a couple of weeks ago, when Saudi Arabia took the decision to flood the market with oil. Perhaps markets don’t envisage the kingdom being able to withstand such significant drops to oil prices and expect them to revoke their actions?

More interesting than the geopolitics at play here is the continual correlation between GB gas and power contracts with Brent crude oil throughout all of these scenarios. It has been assumed previously that as the UK gas mix has become less dependent on European or “continental” gas, typically from Russia and pegged to the oil price, that NBP gas markets would display more distinct trends from the oil market. However, 2020 so far shows this is not necessarily the case. 

The explanation for the this is partly due to the resurgence of LNG imports into the UK over the past couple of years. Whilst the European, and Norwegian, share of the gas mix has declined LNG has increased to averaging roughly a third of all gas in UK. This has likely kept a similar share of the NBP gas market which is linked or indexed to the oil markets in some way. With gas still the marginal fuel in the power market, the correlation of oil to gas therefore continues to feed into the power markets.

As the impacts of coronavirus on the energy markets continue to shift daily the trends in global oil markets will likely continue to impact GB energy markets both on the producer and consumer side of the market.

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