The triple whammy of coronavirus, oil price collapse and LNG oversupply has impacted the overall gas market negatively, according to global energy consultancy firm Wood Mackenzie’s statement Wednesday.
“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,” Wood Mackenzie research director Robert Sims was quoted as saying in the statement.
“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,” Sims said.
Sims said that despite the negative effects, global demand for LNG is forecast to rise to 371 million tons (Mt) in 2020 by 6 per cent year-on-year.
- Europe bracing for economic impacts of coronavirus
The effect on China's gas use was serious, as rigorous containment measures were rapidly placed in place through January and February, said Wood Mackenzie predicting a full-year decline in gas demand between 6 billion cubic meters (bcm) and 14 bcm in 2020, equivalent to 2020 gas demand rise in 4 to 6 percent with a resumption in economic development.
According to the consultancy, although China’s timely strategies such as reducing gas prices to non-residential users, which provides support to coronavirus-affected businesses to resume operations, none of them were sufficient to stir lost-demand recovery and new coal-to-gas switching programmes.
China’s LNG demand is expected to reach 65 Mt in 2020, representing a 6.6% growth year-on-year, said Mackenzie.
In Europe, consultancy said, low gas prices continue to help coal-fired generation and pointed to the uncertainties of potential control steps for coronavirus and the challenges of economic downturn.
“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 Mackenzie.
-Sustained low oil prices
Should low oil prices be sustained, Wood Mackenzie said oil-indexed LNG contracts will become cheaper in Japan and South Korea. Similar to how prolonged low TTF prices in 2019 eliminated coal from power grids across North Western Europe, this could interrupt coal production in favor of gas in both markets as early as August.
“We expect Japan’s LNG demand to grow 5.1% to 81 Mt in 2020, compared to last year. At the same time, South Korea’s LNG demand is expected to rise 7.7% to 42 Mt, as more LNG displaces coal in the power sector of both countries,” Sims said.
Mackenzie also pointed to possible depletion of the related U.S. gas supply which could further damage U.S. LNG companies, and underlined that the effect is likely to be felt by 2021 due to the sluggish existence of drilling reductions.
“At a lower US$35 per barrel oil price, we could expect about 2 billion cubic feet per day (bcf/d) of US gas production to be impacted by middle of next year,” Sims added.
After the emergence of the deadly coronavirus outbreak, which caused a global crises with a death toll of more than 42,300, the worldwide decline in oil demand resulted in a standoff between major oil producers Russia and Saudi Arabia.
Tensions have risen in oil markets following a breakdown in talks between the Organization of Petroleum Exporting Countries (OPEC) and Russia on March 6 to secure a further oil output cut in their production levels.
The futures of Brent and WTI crude plummeted to under $20 per barrel, however crude oil prices were up to start Tuesday on a higher note as the U.S. and Russia are planning to discuss the global oil market and the low price environment.
By Sibel Morrow