The global glut of gas is deepening as the coronavirus cuts into Chinese demand, backing up LNG tankers and disrupting normal trade flows.
By some estimates, China’s oil demand has fallen by 1 million barrels per day.
By some estimates, China’s oil demand has fallen by 1 million barrels per day (Mb/d), while other estimates say the impact is even larger. But the coronavirus is also hitting the global market for natural gas. The crisis comes at a time when global gas trends were already heading in a bearish direction. As a result, prices have collapsed worldwide.
LNG market down
In 2019, a wave of new LNG export terminals came online, adding a large dose of fresh supply that dragged down prices. In a broad sense, global demand is still on the rise, particularly in China, but even before the coronavirus analysts had predicted that the world would need several years to digest the supply increase from last year.
But the outbreak of the coronavirus and Beijing’s efforts to stop the spread of infections resulted in tens of millions of people quarantined. The government idled factories, as did multinational companies operating in the country. Thousands of flights have been cancelled.
Bringing much of the world’s second largest economy to a partial halt has global ramifications.
Needless to say, bringing much of the world’s second largest economy to a partial halt has global ramifications. But disruptions to global supply chains happen very quickly. China’s CNOOC declared force majeure on LNG purchases in an effort to slow imports. Shell and Total rejected those declarations, setting the stage for legal battles. “As many as 35 February cargoes could be subject to force majeure declarations with at least five already diverted as of Feb. 7,” ship broker Poten & Partner estimated in a report, according to S&P Global Platts.
Prices for LNG in Asia—the so-called Platts JKM marker—fell below $3/MMBtu in recent days, a historic low. The steep drop in Chinese demand has dragged down an already oversupplied market.
For now, most analysts see depressed prices continuing through 2020. Goldman Sachs estimates that even after China rebounds from the coronavirus, the country’s LNG demand growth will be flat compared to last year.
“2020 global gas oversupply looks materially worse than 2019, with nearly 50mtpa of excess LNG that needs to find a home—before accounting for any demand loss from the coronavirus in China,” Morgan Stanley wrote in a note.
“Honestly speaking, if I have one wish for free, please send me an ice blizzard for the gas prices,” Rainer Seele, CEO of Austria’s OMV, told CNBC’s “Squawk Box Europe” on Thursday.
Appalachia feels the effects
The effects could ripple back to the U.S., where domestic gas markets were already in a state of depression. In late January, Bank of America Merrill Lynch said that the warm weather in the U.S. “brought forward a ‘gasmaggedon.’”
“We thought natural gas risked breaking the Jefferson (or $2 bill) in 2020, but did not expect it as soon as January!” the bank wrote in a report in late January. Typically, demand in winter is at a seasonal high, so prices tend to trade at much higher levels.
EQT, the largest natural gas producer in the U.S., warned back in December about financial stress in the gas industry.
Currently, U.S. natural gas prices below where most drillers can be profitable. EQT, the largest natural gas producer in the U.S., warned back in December about financial stress in the gas industry. Notably, prices were trading much higher back then. “Gas prices are down. It has a big impact, the difference between $2.75 gas and $2.50 gas,” EQT CEO Toby Rice said. “A lot of this development doesn’t work as well at $2.50 gas.” On February 10, Nymex gas prices for March delivery fell below $1.80/MMBtu. EQT’s share price has halved since the start of the year.
Morgan Stanley said that because of the lack of gas storage capacity in Asia, a lot of the gas surplus will be dumped in Europe. The investment bank said that coal-to-gas switching in Europe could erase about half of that surplus, compared to a pre-coronavirus estimate, making coal a big victim of the current gas glut. But that won’t be enough. “Our base case remains that supply needs to be curtailed to balance the market, and that some of this curtailment will occur in the US (reducing US LNG exports).”
In other words, the collapse of Chinese demand, and the resulting crash in LNG prices, could disrupt gas exports from the U.S. That, in turn, could drag down U.S. natural gas prices even more. “LNG shut-ins remain a risk for US natural gas prices,” Morgan Stanley said in a note.
“We see risk of US gas prices breaking down into the $1.50-$1.75 range when these LNG ‘curtailments’ first show up (likely in 2Q20),” Morgan Stanley concluded. The bank said that the market could tighten next year, as shale gas production is already slowing down. But the LNG curtailments could trap additional supply in the U.S., leading to higher inventories heading into next winter and preventing a rebound in prices.
Sub-$2 gas will likely force gas drillers to make painful cutbacks. Morgan Stanley estimates that Appalachia will lose 1 billion cubic feet of gas per day (Bcf/d) by the end of 2020, compared to the end of 2019.
After a decade of tremendous production growth, output in the Marcellus shale has ground to a halt.