By Irina Slav
Natural gas, the poster child of the fossil fuel industry and the bridge fuel to a renewable future, has suffered its fair share of problems amid the coronavirus pandemic. And it may suffer the same fate as oil, at least when it comes to storage. It may also suffer the same fate with regards to negative prices.
For now, natural gas is faring better than oil in terms of prices and loss of demand. According to an analysis from Wood Mackenzie’s Kristy Kramer, Head of Global Gas Market Research, gas demand has fallen by just 2 percent since the start of the crisis, compared with 6 percent for oil. That’s thanks to sustainable demand from several industry sectors, notably power generation and heating. However, prices have plummeted because the outbreak came amid an already oversupplied gas market, pretty much the same as the oil market. Besides, Kramer notes, gas storage was already getting full because of the mild winter. Now it is likely to get fuller.
In the United States, withdrawals this winter were the lowest since 2015/2016, with the total amount in storage 19 percent above the five-year seasonal average, the Energy Information Administration said in April. The agency forecast that gas in storage will remain at elevated levels throughout the summer period as well.
Meanwhile, in Europe, storage is also filling up fast. Bloomberg reported earlier this month that as traders look for places to stash their unsold gas, storage facilities across the continent may get topped by July, especially since they were already half full before refilling season began. For Europe, it was a combination of mild weather, a rising share of renewables in the power generation mix, and a crash in industrial demand for gas amid the pandemic that did natural gas in.
Wood Mackenzie’s Kramer expects that some 15 to 20 metric tons of liquefied natural gas will be wiped out from demand during this summer season. That’s about 5 percent of the global total, with a lot of the reduction in supply coming from U.S. producers whose production costs are higher than selling prices.
However, that won’t be enough to erase the gas market glut as new supply comes in later this year and next, Kramer noted in her analysis.
Rystad Energy earlier this year forecast that global liquefied natural gas supply this year could rise by 17 million tons to a total 380 million tons. Demand, on the other hand, was seen to increase by just 6 million tons to 359 million tons. And while under normal circumstances markets have been able to soak in excess gas, the circumstanced this year are anything but normal.
“In 2020, when ample LNG supply is coupled with demand destruction, prices have already hit record lows and storages have already filled faster than usual. Production shut-ins are becoming a realistic possibility,” Rystad Energy said earlier this month.
In the U.S., these have already begun: a lot of U.S. natural gas comes from oil wells as associated gas. Now that producers are shutting these wells in, natural gas supply is falling alongside the production of crude oil. This has served to prop up U.S. prices, Wood Mac’s Kramer said, although it has been bad news for exporters looking for a competitive edge in an oversupplied market.
With storage filling fast, demand slow to pick up—even if it never stopped growing in China—and prices depressed, what’s next? Negative prices are a possibility, according to a senior executive with one of China’s largest gas distributors, ENN Energy Holdings.
“For natural gas, I have heard about the possibility of negative prices. I also think it could happen,” Wang Yusuo, chairman of the company, told Bloomberg earlier this month. “That’s because natural gas has even more limited storage capacity and its production is also more rigid. So it may happen. But I don’t think it will be a dominant or long-lasting scenario.”
And the outlook? According to Wood Mackenzie’s experts, it’s a bit brighter than that of oil. While in oil there is talk about permanent damage to demand, the prospects of natural gas demand are better, thanks to Asia, once again. According to Kramer, the recovery would be slow and gradual, but demand will rebound and continue growing at a rate forecast before the pandemic.
The industry is optimistic, too. The CEO of Texas-based gas pipeline operator Williams, for example, said this month that demand for natural gas was a lot more robust than demand for oil, thanks largely to the power generation industry, which meant that sooner or later it would recover, while the outlook for oil remained doubtful.
There is a risk, however, and it’s called green recovery. For now, the main push for a green recovery is focused in Europe, which happens to be a major gas market. A green recovery would certainly affect oil demand on the continent. It could also affect gas demand if the more extreme voices insisting on maximum renewable pressure are heard over the moderates who see natural gas as an indispensable part of the post-crisis future.