Unquestionably the current global health situation is going to cause a severe economic crisis not seen since the Great Depression. This is already apparent in the dramatic decrease in demand for fossil fuels. Oil is hit especially hard as 60 percent of consumption stems from activities such as driving and flying. The demand for natural gas has fared slightly better with a lower decrease. However, storages in one of the most important gas markets of the world, Europe, are quickly filling up.
The EU's gas market and infrastructure are highly developed with thousands of miles of pipelines connecting consumers with domestic and external producers such as Norway, Algeria, and Russia. Furthermore, the continent’s total regasification capacity stands around 230 bcm which is sufficient to cover approximately 40 percent of total demand. After Asia, the EU is the largest market for LNG.
The seasonal nature of the market requires significant imports in the spring and summer periods to fill storages for the heating season. However, a combination of unusual factors means producers are facing difficult times. The relatively mild winters of 2018-2019 lowered demand more than expected meaning that storages were fuller than usual going into the 2019-2020 heating season. Under normal circumstances, prices would have already been depressed, but the current health crisis has made matters worse beyond any expectation.
Currently, storage facilities are almost 60 percent full and most will be topped in July. According to Emstream, a liquefied natural gas brokerage, “we start to hit full at normal injection rates some time between end-June and end-July. Some countries with limited capacity such as the U.K. could start hitting distress levels as soon as next month as their fast-cycle storage gets close to full, limiting flexibility.” Related: 5 Points To Consider Before Buying Oil Stocks In 2020
Now that the biggest hurdle in the fight against the novel Coronavirus has been taken, most European countries are slowly easing social distancing measures that have crippled the economy. Germany with, arguably, one of the most successful policies during this crisis, has already restarted the economy which undoubtedly will raise demand for natural gas. It is highly unlikely, however, that it will seriously decrease the global gas glut.
The low energy prices have dealt a devastating blow to the U.S. shale oil industry, and subsequently, associated gas as a by-product. This has somewhat reduced the gas glut. Furthermore, as many as 20 LNG cargoes from the U.S. have been canceled by buyers in mostly Europe. Although this is welcome news when keeping in mind the available capacity of storages, it is not enough to significantly improve the current situation.
Certain insiders, however, predict a less gloomy future. According to Jason Feer, global head of business intelligence at Poten & Partners in Houston, “When it fills up, there won’t be room for more U.S. LNG, but we are already seeing cancellations so the market is starting to anticipate.”
While the extremely low energy prices are bad news for exporters, the current market conditions are welcome news to buyers. Lower energy bills mean that more money is available to invest in other sectors and kick-start the economy. European countries, especially, have a high level of connectivity. Sufficient gasification facilities and pipeline infrastructure connecting customers with major producers in the north, east, and south means prices are relatively low compared to, for example, Asia.
Although LNG flows into Europe have been exceptionally high, imports are gradually slowing as storages are filling. In the long term much depends on the speed with which European economies can recover. If demand proves resilient, natural gas will remain flowing into Europe. However, it is much too early to be able to predict any recovery of the market. Already, global gas demand has fallen by 5 percent.
Much depends on seasonal and economic factors. There is a very high probability that storages are going to be filled to the brim this year in combination with a global LNG glut and the availability of cheap Russian piped gas. Prices, therefore, will stay depressed for at least 2020. Going into next year, the global economic recovery after Covid-19 will show how fast demand will recover. Also, a colder than usual heating season going into 2021 could alleviate the situation somewhat. However, it is yet too early to decide on anything as the 'fog of crisis' has decimated predictions. The updated market conditions will determine whether natural gas exporters can remain afloat in Europe.
By Vanand Meliksetian for Oilprice.com
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