There was a ton of hoopla and headlines about the May oil contract hitting -$37, but the real story is the plentiful supply of oil, continued strong production, and demand destruction. These factors will have cascading effects over the next few months if prices remain low.

One particular effect will be severe cuts in shale production which will have its own set of effects such as job losses in shale regions, the stress in credit markets, possible bank failures, impact on political fundraising, and a potential boost for natural gas.

Shale Cuts

The breakeven price for shale production is between $45 to $55 per barrel for most projects. However, the marginal breakeven cost is much lower given that companies have already invested significant sums and made commitments to employees and vendors. It's also quite expensive to shut down a project and then restart it. There's also the human instinct to hope that prices will rebound rather than making a decision that is an admission of failure.

In 2016, prices dropped below these levels but shale production only dropped from 5 million to 4.5 million barrels per day. Oil prices did manage to rebound which validated their decision to keep pumping. As of late-2019, it was producing close to 7 million barrels per day. Thus, only persistently, low oil prices will bring cuts to shale oil.

Natural Gas Bear Market

While oil's dramatic collapse has intensified this year. Natural gas has been in a deep depression for nearly a decade. It peaked in early 2008 around $14 per cubic foot. Since then, it's trended lower and is currently around $1.80. Unlike most commodities, it failed to recover during the bull market.

However, in recent years, supply and demand dynamics have improved in addition to reduced drilling due to low oil prices. Natural gas is starting to be exported. Also, consumption has increased with more power generation switching to natural gas from coal and oil.

Natural gas demand is much more stable than oil since homes have to be heated and powered. However, there are certain negative effects due to lower industrial activity and less use from restaurants. The supply and demand deficit is much less than oil. And something like the weather which leads to more demand could lead to higher prices.

Silver Linings

On a technical level, natural gas looks to be putting in a double bottom with its 2016 price which creates a low-risk opportunity. Given the growth in the shale industry, one popular trade has been to go long crude and short natural gas. A reversal in this trade could also drive natural gas and its producers higher.