U.S. tightens exports to China’s chipmaker SMIC, citing risk of military use
Global natural gas markets are under severe pressure due to a stubborn supply overhang in the Asia-Pacific, which typically accounts for nearly two-thirds of global demand for the super-cooled fuel.
Now, oversupply is colliding with the destructive economic impact of the Covid-19 pandemic on top of weakened demand in the first part of the year from yet another exceptionally mild winter in the northern hemisphere.
These dynamics have put natural gas demand on course for the largest annual fall in history, according to the International Energy Agency’s (IEA) Gas 2020 report.
But some analysts are holding out hope that China and India could help to save the day through accelerated buying in the months ahead.
Global gas consumption is expected to fall by 4%, or 150 billion cubic meters (bcm), this year, the Paris-based agency said in its June 10 report. To put that drop into perspective, it is double the decline seen during the 2008 global financial crisis.
Adding to the quandary, mature markets in Europe, Asia and North America will see the sharpest declines, representing a whopping 75% of total gas demand destruction in 2020, the IEA said.
“The record decline this year represents a dramatic change of circumstances for an industry that had become used to strong increases in demand,” said IEA executive director Fatih Birol. “The Covid-19 crisis will have a lasting impact on future market developments, dampening growth rates and increasing uncertainties.”
The forecast excludes the possibility of a Covid-19 second wave – a growing possibility in certain major countries including China – which would in turn be cataclysmic for energy demand as well as the global economy.
Moreover, global gas demand is projected to rise by only 1.5% annually to 2025, representing 75 bcm worth of demand destruction each year, compared to a pre-pandemic forecast of 1.8% demand growth.
LNG, however, is still projected to make up most of those gains, increasing around 21% by 2025 to 585 bcm/year.
The ongoing triple whammy of a supply overhang, warmer winter temperatures, and pandemic fallout has driven down gas pricing benchmarks to record lows in Europe, the US and Asia, well beneath producers’ breakeven points.
Natural gas prices in Europe could now be heading into negative territory amid oversupply problems, reminiscent of US-oil price benchmark West Texas Intermediate (WTI) prices falling into sub-zero pricing levels a little more than a month ago as inventory levels kept building.
The UK’s National Balancing Point, the weakest of the four major European gas pricing indexes, recently dropped to the equivalent of about US$0.99 per million British thermal units/MMBtu.
Natural gas prices in the US have also been tanking. On June 12, front-month gas futures fell 2.1 cents, or 1.2%, to an anemic $1.79/MMBtu.
Prices could see a slight rebound later this year and into early 2021, moving from an average of US$2.06/MMBtu in September to $3.08/MMBtu in January, the US Energy Information Administration said in its June Short-Term Energy Outlook.
The Japan Korea Marker (JKM) spot LNG benchmark for deliveries into northeast Asia also remains at record lows and has been hovering around the market troubling US$2/MMBtu price point for much of the year – a price that has seen once cheap US-sourced LNG become expensive, resulting in around 50 US-sourced LNG cargoes cancelled in the month of July alone.
The July cancellations, roughly double what was reported the previous month, represents almost two-thirds of the average volume of US-sourced LNG that was produced monthly in January at the start of the pandemic, commodities data provider S&P Global Platts said.
The average price of spot-LNG imported into Japan, the world’s largest LNG importer, was posted around US$2.4/MMBtu in May. For the same period last year, it fetched around US$5.4/MMBtu while it commanded a respectable US$9.3/MMBtu in May 2018, according to Japan’s Ministry of Economy, Trade and Industry (METI).
Now, with LNG spot prices below producer breakeven points, the market is scrambling for a sense of normality amid troubling economic headwinds.
Slower growth in gas demand will mean liquefaction capacity additions will outpace LNG import growth through 2025, potentially reducing the prospects of a tighter market, the agency added. Previous forecasters had generally agreed that markets could reach some semblance of equilibrium by mid-decade.
India to the rescue?
Both China and India are poised to help gas markets by soaking up more supply, depending on both governments’ individual energy policies.
China, for one, will likely bypass Japan for the top LNG importer slot by 2023-2024, while India will move past South Korea to take the third top position.
China offers a mixed bag since Beijing energy policy makers are making a pivot back to coal usage for power generation. China permitted more new coal-fired power plants in March than it did in all of 2019, reversing a two year slowdown in its coal expansion.
However, so far this year China’s LNG imports have represented a bright spot in an otherwise bleak market. The country’s total gas imports increased by 3.7% year on year in May, while LNG increased a massive 21% to 5.9 million tons, customs data shows. For the January to May period, China’s gas imports increased 40.12 million tons.
India had also been taking advantage of low LNG prices, but that procurement has taken a hit over the past few months as the country’s demand has plunged due to the impact of the Covid-19 pandemic.
India’s LNG imports in May dropped some 40% from the same period a year earlier. However, May’s import volumes were still up 4% from April levels.
Going into next year, India is forecast to return as a major buyer of the fuel. The country will likely see an estimated 28 bcm per year increase in total gas consumption from 2019-25 due to a combination of government policies and improved LNG and pipeline infrastructure.
India will also increasingly make up a larger percentage of LNG demand coming out of the Asia-Pacific region. The IEA forecasts that Asia’s percentage of LNG demand from 2019-2025 could increase from 69% to 77%. India will make up the largest percentage of that increase at around 20%.
India’s LNG imports over the five-year forecast period could hike a massive 50%, the IEA said. New Delhi, for its part, has recently pledged to spend around US$10.2 billion to build out gas pipeline infrastructure across the country.
However, that’s where much of the problem lies, with cumbersome regulations coming into play, including difficulty getting state governments on board, as well as financial and technical difficulties for builders. There are also challenges building pipelines in certain Indian states during monsoon seasons and other construction hurdles.
A EIA report said in May that the lack of pipeline infrastructure near LNG terminals is affecting both existing and planned Indian LNG terminals.
Future growth in India’s LNG imports, and as such its ability to help sustain markets in the region, is contingent on connecting LNG regasification terminals on coasts to demand centers further inland via yet-to-be-built pipelines.