An oversupply of LNG, along with mild winters and record high stock levels pushed gas prices around the world to their lowest levels on record earlier this year.
Over the last few weeks, the impact on demand from coronavirus and the collapse in oil prices has seen some gas benchmarks fall even further. The oversupply is hitting producers and could result in project postponements, lower throughput and industry consolidation – which may push prices up in future.
Gas fundamentals across the world are exceptionally weak. Supply has risen substantially over the last year, with output in the US (by far the world’s biggest natural gas producer) alone up 10% at almost 120 bcf/d in 2019, while exports trebled to 12.8 bcf/d – mostly through LNG.
Australia and Russia also saw major increases in LNG exports. Overall, a record 40mn mt of new LNG supply was added to the market in 2019, and this year another 20mn mt is expected with a further 10mn mt/yr due in 2021 (although project delays could now reduce this as capex is slashed).
Until mid-2019, rapidly rising supply had been absorbed to a large extent by demand growth. That tailed off last year, and now the hit from the coronavirus pandemic has seen demand fall in some areas, leading to a clear surplus.
Chinese demand has fared worst so far – industrial and petrochemical activity is down sharply, especially in Hubei Province. This has led major buyers, CNOOC and PetroChina, to declare force majeure on some LNG and pipeline term deliveries.
So far, it is unclear exactly how much reduction there has been in Chinese demand. Early indications were that it was down about 1% in January, but on February 28th, it was put at 29.65 bcm by the National Development and Reform Commission (NDRC), which is an increase of 3.4%.
This is higher than many expected, although much lower than consumption growth in January 2019, which was 18.1%. Gas output in January rose by 8.4% to 16.66 bcm, while imports – both piped and in LNG form - fell 1.6% to 13.35 bcm. February is likely to see more significant falls, but March could witness a recovery as quarantines and other restrictions are eased.
Attention has now switched to Europe, where lockdowns in Italy and Spain, as well as restrictions in other areas, are likely to have a similar (and possibly greater) impact on demand than in China. As the virus spreads around the world, demand is likely to fall in many areas, although it is unclear by how much.
Gas price benchmarks have been sliding in response. In the US, the NYMEX front-month future was around $1.81/mn Btu at the end of the second week of March (just off record lows seen earlier in the year), while the Henry Hub day-ahead price was also close to record lows at $1.72/mn Btu.
In the UK, the NBP front-month, which is a major influence on Atlantic Basin LNG prices, was at $2.85/mn Btu – compared to $5.72/mn Btu for winter gas on November 20th (although that had already fallen 15% by late December).
In Continental Europe, the main benchmark at the Dutch Title Transfer Facility (TTF) was slightly higher at $2.90/mn Btu.
LNG spot prices have also been hit hard, with LNG futures on the US Gulf Coast at the end of the second week of March at $2.39/mn Btu for front-month April, and $2.45/mn Btu for May.
In Northeast Asia, which traditionally has the world’s highest LNG prices, levels moved below $3.00/mn Btu in February. They then rose slightly before plunging to record lows of $2.50/mn Btu as the coronavirus impact on demand became increasingly apparent.
Until the second week of March, many LNG sellers had been protected from the gas price falls by links to crude prices under long-term supply contracts. But now crude has collapsed to near $30/bl these LNG sales (along with some Russian pipeline exports) will also see sharp price falls.
For example, an LNG contract with a 12% slope to Brent crude fell to a premium of about $1.17/mn Btu to Asian spot prices after the crude price fall, down from more than $4/mn Btu just three weeks earlier, according to S&P Platts (although most contracts lag the market).
Supply under pressure
The low prices are already reducing supply and lifting demand in some areas – helping to balance the market, although equilibrium remains some way off. US sales to Asia are having trouble making money at current prices, which is leading to reduced output at some US export terminals, and there have also been weather-related shut-ins.
Australian LNG exports have been hit as well. For example, in February the state of Queensland, home to the ConocoPhillips-Origin Energy Australia Pacific LNG (APLNG) project, Shell’s Queensland Curtis LNG and the Santos-led Gladstone LNG, shipped 1.05mn mt of LNG to China, down over 15% on February 2019.
Even before the full extent of the outbreak became clear, Shell warned that it may have to shut-in liquefaction plants this year.
Looking ahead, analysts are cutting demand outlooks and price forecasts. For example, in early March Rystad Energy cut its forecast for TTF prices to $3.95/mn Btu for 2020, down over $1.50/mn Btu from a forecast of $5.56 it made in January. Its prediction for Asian spot prices dropped to $4.63/mn Btu for 2020, from $6.32 previously.
However, those assessments did not account for the latest coronavirus news in Europe, or the plunge in oil prices, so lower forecasts can be expected to emerge over the coming days.
The fall in oil (and gas) prices means oil and gas companies are cutting capex, which is leading to the deferral or cancellation of projects. Qatar, for example, has already pushed the FID date for the first phase of its giant planned expansion back into 2021.
The coronavirus pandemic has also put upstream projects at risk of delay as a result of manufacturing shutdowns and shipping bottlenecks. Wood MacKenzie estimated in late February that projects with a combined capacity of 4bn cf/d of gas and 1.5mn b/d of oil were at risk of delay.
There is some upside from the lower prices in the form of higher sales to price sensitive customers. In particular, the latest falls in oil prices could make gas competitive with coal in Japan and South Korea (where most long-term supplies are linked to crude prices), according to Wood Mackenzie, which would encourage coal-to-gas switching in their power sectors.
“In Asia, the fall in oil prices will start to affect the pricing of gas under long-term contracts from late 2020. This could start to have a major impact on the competitiveness of gas in major Asian markets like Japan and South Korea,” said Wood Mackenzie.
In Europe, the spot price drop has already seen an improvement in gas’s competitiveness versus coal. With Summer TTF spot prices below €10/MWh, gas power plants of just 57% efficiency are profitable for peak-load power generation on most days, according to Rystad Energy, and sometimes even 35%-efficiency units may be profitable.
Rystad had expected coal-to-gas switching to increase by 6% in northwest Europe this year, but this could rise even further.
Low prices have also stimulated demand from India – - the cleaner air LNG consumption could provide to India’s choking cities is a rising priority, although demand is currently constrained by a lack of import and distribution infrastructure.
However, two new terminals went online last year, and pipelines are quickly being laid. Russell Hardy, the CEO of leading trader, Vitol, said low LNG prices would help to create demand in India – provided the gas can get to customers.
The full extent of the impact on demand from coronavirus is not yet known. But the situation is unprecedented and has thrown the profitability and plans of much of the industry up in the air.
For the time being, it’s a matter of survival and adaptation. As time passes and the situation clarifies, companies can perhaps begin to plan for the future again, although it may take a while to get used to what could be a very different world.