Sandy Singh, Research Assistant in the Gas Market Analysis Department at the GECF co-authored this opinion editorial.
As the world slowly progresses through 2020 and adapts to what may be a new normal for some time to come, countries have started easing lockdown measures as governments try to balance weakening economies and containing the spread of COVID-19. The gas market is also struggling to cope as gas demand has been diminished and prices have reached unprecedented lows.
This article provides our price assessment up to August 2020 and examines how natural gas and LNG prices reacted to an oversupplied LNG market, combined with an aggressive COVID-19 that drastically impacted gas demand worldwide. Our analysis also looks at the impact of COVID-19 in terms of the survival strategies of companies to manage supply and cut investments.
A comparative analysis of the trends in daily gas and LNG prices in 2020 compared to the previous year illustrates how the market has responded to these events (see Figure 1). At the start of 2020, prices were relatively weak with daily prices hovering in the range 2.00-5.50 US dollars/million British thermal units (mmBtu). The Northeast Asia (NEA) Spot LNG price was at a premium to European LNG prices in January 2020, however, this quickly deteriorated and it slumped to record lows below 2 US dollars/mmBtu at the end of April.
Over the period 22 April – 8 May 2020, daily spot and LNG prices converged to below 2 US dollars/mmBtu. Another anomaly observed was the fact that Henry Hub (HH) became the most expensive gas on 23 April 2020, at 1.86 US dollars/mmBtu whilst the National Balancing Point (NBP), Title Transfer Facility (TTF) were 1.47 US dollars/mmBtu, 1.80 US dollars/mmBtu respectively, while North East Asia (NEA) Spot LNG price was around 1 per cent below the HH, making even the margin to markets negative, and thus shrinking export opportunities for US LNG. In the first half of 2020, gas and LNG prices in Asia and Europe plunged by more than 50 per cent year-on-year with the average NBP, TTF and NEA Spot LNG prices declining by 57 per cent, 53 per cent and 50 per cent respectively.
In comparison to the previous year, European and Asian spot gas and LNG daily prices ranged from 7-9 US dollars/mmBtu in January 2019, after which they sharply declined over the first quarter of 2019 and converged between 4-5 US dollars/mmBtu at the end of May 2019. This contrast emphasises the stark reality of the current situation. Global gas demand was already bearish due to expectations of mild weather conditions and then tumbled under the restrictions and lockdown measures associated with COVID-19. This, combined with an already oversupplied market, has created the unparalleled pricing scenarios that we are witnessing today.
Notwithstanding the current situation, market forces have started to react to find its equilibrium and prices have started to recover. While prices have not yet reached the levels of 2019, there has been an upward trend since June 2020. This has been primarily driven by improved market fundamentals with expectations of higher gas demand as we approach the winter season and easing of lockdown measures, combined with lower than expected LNG supply due to delayed projects.
On the supply side, the US producers have started to bring associated gas production back online due to a recovery in oil prices and rising domestic demand, after many wells were shut-in in response to uneconomic oil prices in the first half of 2020. The US Energy Information Administration has revised its price expectations upwards and, according to their Short Term Energy Outlook September 2020, expects HH spot prices to average 2.16 US dollars/mmBtu in 2020 and 3.19 US dollars/mmBtu in 2021. While a number of US shale gas producers have filed for Chapter 11 bankruptcy, the Trump administration has announced its intention to provide federal assistance to these companies.
Globally, many LNG Final Investment Decisions (FIDs) have been delayed, with more projects expected to be shelved as their economics are reassessed within the current market situation. Furthermore, there may also be delays for projects under construction due to workforce and supply chain limitations. In addition, there have been major budget cuts across the sector from International Oil Companies (IOCs), National Oil Companies, and service companies estimated at more than 110 billion US dollars as of 15 June 2020. Several IOCs have also revised down their price assumptions for oil and gas prices over the next three to four years.
The real effect of low oil prices on gas/LNG prices has started to become more prominent in the second half of 2020 and will continue to be observed in 2021, due to oil price lag of three to six months in the majority of oil-indexed long-term contracts. Figure 2 below illustrates the fluctuations between gas/LNG vs coal prices in the Asian market on a Btu basis. The NEA LNG spot price was on a downward trend in the first half of 2020, with the exception of March, in which there was a peak owing to easing of lockdown measures in China. Its trajectory has since changed as prices started to recover after bottoming out at about 2 US dollars/mmBtu between April to June. In the first half of 2020, NEA Spot LNG was 34 per cent lower than the China QHD coal price, averaging 2.88 US dollars/mmBtu and 3.85 US dollars/mmBtu respectively. The monthly average NEA Spot LNG price dipped below the China Qinhuangdao (QHD) coal price in February 2020 however, based on its recent upward trend and improved market fundamentals, LNG prices may once again surpass the coal price in China.
Sustained low oil prices would definitely boost the price competitiveness of natural gas compared to coal in Asia. This is evident in the trend observed in Figure 2 above in which estimates for oil-indexed contracts, Japan LT LNG and New LT LNG, have steadily declined since January 2020. The average Japan LT LNG price in the first half of 2020 was 8.77 US dollars/mmBtu, 16 per cent lower year-on-year. The New LT LNG price experienced a steeper decline, as it is based on a 3-month historical average of Brent and averaged 6.34 US dollars/mmBtu in H1 2020, 22 per cent lower year-on-year. Moreover, the rebound in oil prices for the past five consecutive months is reflected in the new LT LNG price which has steadily increased since July 2020.
Oil prices have experienced a firm recovery following OPEC+ production cuts of 9.7 million barrels per day that came into effect from 1 May 2020 and was extended to July 2020, as well as increased demand due to easing of lockdown measures in many countries. Furthermore, ICE Brent Futures climbed above 40 US dollars per barrel in June and averaged 45 US dollars per barrel in August 2020. While oil prices have shown some signs of recovery, they are still much lower compared to the previous year, with average ICE Brent Futures for the period January to August 2020 averaging 43 US dollars per barrel, 34 per cent lower year-on-year. There is still great uncertainty surrounding consistent oil price gains which will depend on OPEC+ and its allies upholding commitments, the success of easing lockdown measures, the possibility of a multi-wave pandemic, as well as the success vaccine trials.
Gas and LNG prices are expected to stabilize in the first quarter of 2020 as gas demand recovers, with average Asian and European spot gas and LNG prices in the range 4-5 US dollars/mmBtu. These expectations have pushed up our previous price forecast. Annual average spot European and Asian gas and LNG prices for 2020 are forecast to be slightly above 3 US dollars/mmBtu and around 3.5 US dollars/mmBtu respectively, which would be about 28 per cent and 35 per cent lower year-on-year.
The magnitude and timing of gas demand recovery will depend on two crucial factors. Firstly, on the strategies that oil and gas companies employ in going forward and their risk appetite. Secondly and more importantly, policy decisions that are implemented by governments as they attempt to balance economic recovery, environmental considerations and the possibility of a multi-wave COVID-19 will be critical to gas demand prospects and thus gas and LNG prices.
The gas market is suffering from unprecedented turbulence for all market players. Oil and gas producers around the world are cutting budgets, postponing projects and reducing jobs. The GECF producers are not immune to these dynamics and such low prices have resulted in the postponement of some projects, without losing the focus on the most lucrative ones. Nevertheless, it is worth mentioning that the GECF, as a dominant gas and LNG supplier in the world representing 72 per cent of global natural gas proven reserves and strengthened by long-term experience in oil and gas industry, continues to sustain its supplies to its customers.
Though the GECF Member Countries’ gas and LNG exports have declined in the face of eroded gas demand, this has not prevented them from showing resilience thanks to their amortised costs of the production chains and the strategies of budget optimisation and diversification that continue to be undertaken.
The response of the GECF community has always been in line with the Statue of the Forum, its long-term strategy and the Summits’ declarations of Heads of State and Government that call for strengthening energy security and the importance of fair value for natural gas to sustain investments across the gas value chain. In this regard, the GECF reiterates the crucial role of cooperation and dialogue among producers and consumers for gas market stability. As such, the GECF Member Countries emphasise the essential role of long-term oil/oil products indexed gas contracts to revive natural gas resources developments.
The article is an extract from a detailed report prepared by the two authors for the Gas Exporting Countries Forum (GECF).