Page 6 - FSUOGMWeek92020

FSUOGM COMMENTARY FSUOGM
Europe to gain from cheap gas
The coronavirus has sapped demand for gas in the world’s top gas import market
EUROPE
WHAT:
While producers are suffering, consumers are set to gain from low gas prices.
WHY:
The coronavirus outbreak has sapped demand, exacerbating oversupply.
WHAT NEXT:
Low prices will encourage coal-to-gas switching and enable countries to get better supply terms from Russia.
THE coronavirus (COVID-19) outbreak, which experts warn is on the verge of becoming a pan- demic, is wreaking havoc on oil and gas produc- ers’ earnings. But for consumers it is a different story.
Record-low gas prices in Europe are set to translate into economic gains, while also encour- aging the increased use of gas in the longer term.
COVID-19 has weakened gas demand growth in China, the world’s biggest gas import market. Recent figures released by the National Development and Reform Com- mission (NDRC) show that the country con- sumed 29.65bn cubic metres (bcm) of gas in January, up 3.4% year on year. In comparison, consumption surged by 18.1% y/y in January 2019. Growth is likely to be even slower in February as a result of expanded quarantine measures.
The outbreak has increased oversupply in a global market which has already been contend- ing with a significant glut for more than a year, owing to lacklustre demand in Asia and surging LNG production in the US.
Impact on Europe
Already-low gas prices in Europe are set to fall further. Oslo-based consultancy Rystad last week slashed its forecast for 2020 gas prices in Europe by 29% to $3.95 per mmBtu in light of the outbreak. It made an even deeper cut to its forecast for Asian spot prices, by 57% to $4.63
per mmbtu.
The Asia-Pacific market traditionally offers
a premium to LNG suppliers, but this premium shrunk to a record low last year, resulting in more cargoes flooding Europe. The continent’s LNG imports soared to a record 85mn tonnes, on the back of extra supplies from the US, Russia, Qatar and other countries.
As demand in the Asia-Pacific area is so far the worst-affected by COVID-19, the region’s premium is likely to stay small or become smaller this year, leading to more cargoes being re-directed to Europe. This is good news for the operators of LNG import terminals, which in previous years have struggled with under-utili- sation. It also bears well for countries looking to reduce their intake of Russian gas.
There are limitations on how much cheap LNG supply Europe can soak up, however.
“Europe is reaching a limit on how large additional gas volumes it can take, as Russian volumes remain high, storages are full, and tem- peratures stay mild,” Rystad analyst Carlos Tor- res-Diaz says.
There will be some forces working to tighten the market. Depending on the duration and severity of the outbreak, some LNG producers may rein in supply.
“With too much LNG and nowhere left to place it, it looks like a supply correction is needed to balance the market,” Edinburgh-based Wood Mackenzie wrote in a recent research note. “We
P6
w w w . N E W S B A S E . c o m Week 09 04•March•2020