Wood Mackenzie, the UK-based energy consultants, said the while the collapse of LNG prices towards US production break-evens was foreseeable, the narrative for the rest of 2020 could not be more unpredictable.
In their latest short-term natural gas and LNG outlook, the consultants weigh the risks that coronavirus, sustained low oil prices and LNG oversupply pose to the sector this year.
“An already oversupplied LNG market comes out of a mild winter with high inventories across Europe and Asia, only to face a global pandemic which has already destroyed gas demand across China and looks increasingly set to do the same across the Asia Pacific and Europe,” explained Wood Mackenzie research director Robert Sims.
“We expect global LNG demand to grow by 6 percent year-on-year to 371 million tonnes in 2020; the numbers will need constant revision as economies around the world feel the force of the growing pandemic,” said the report.
Wood Mackenzie said the impact to gas consumption in China had been severe, as robust containment measures were quickly put in place through January and February 2020.
With a resumption in economic activity, the report estimates a full-year gas demand reduction of between 6 billion cubic metres and 14 Bcm in 2020, translating to a 4 percent to 6 percent growth in gas demand this year.
“With the daily number of new cases continuing to fall in China, policy focus has turned to gearing up economic recovery,” said Wood Mackenzie.
“Daily tariff indicators suggest transport and logistic constraints are being lifted quickly,” it added.
“Also, the government is reducing gas prices to non-residential users, which provides support to coronavirus-affected businesses to resume operations,” stated the report.
However, in Wood Mackenzie’s view these measures were insufficient to stir lost-demand recovery and new coal-to-gas switching programmes.
China’s LNG demand is expected to reach 65MT this year, representing a 6.6 percent growth year-on-year.
The report noted that in Europe, low gas prices continue to support gas-fired generation, though future coronavirus containment measures and threats of an economic downturn pose a risk to market growth.
“Worst-case scenarios could see lockdowns deployed in more countries, risking severe disruptions to global supply chains by restricting movements of people and goods,” said Wood Mackenzie.
One outcome of the oil slump appears to be that sustained low prices supports coal-to-gas switching in the power sector but hurt US producers
Wood Mackenzie forecasts that should low oil prices be sustained, oil-indexed LNG contracts in Japan and South Korea will become cheaper and this could disrupt coal generation in favour of gas in both markets.
This could happen as early as August 2020 and the effects would be similar to sustained low Dutch Title Transfer Facility prices in 2019 removed coal from power grids across Northwest Europe.
The consultants expect Japan’s LNG demand to grow 5.1 percent to 81MT in 2020, compared to last year.
At the same time, the forecast South Korea’s LNG demand could rise 7.7 percent to 42MT as more LNG displaces coal in the power sector of both countries.