WoodMac: Global LNG demand heading into seasonal contraction

The global liquefied natural gas (LNG) industry is about to face its first seasonal demand contraction since 2012.

Demand in summer 2020 expected to fall 2.7 per cent or 3 million tonnes (Mt) year-on-year, says the consultancy Wood Mackenzie.

Lockdown measures and negative economic outlook stemming from the coronavirus pandemic has taken its toll on Asian LNG importing countries, resulting in the second consecutive year of sluggish LNG demand growth.

Wood Mackenzie’s Robert Sims said:, “COVID-19 will drive a global contraction in LNG deliveries through summer 2020 compared to the previous year. This will be the first seasonal contraction in eight years.

“The coming winter season (2020-21) could see a modest 5 Mt improvement in global LNG demand compared to the previous winter season.

“Pricing dynamics between both seasons are also likely to be similar, with the cross-basin spread set by the economics of US LNG. There could be some downside risk to Asian prices this winter if buyers lift some of the deferred volumes from this summer.

“In general, a return to stronger growth is not expected until mid-2021”, Sims said.

Japan, the world’s largest LNG importer, saw LNG demand decline in the first quarter of this year, and imports continued to fall through April as the coronavirus outbreak continued to spread. Although full-scale lockdowns have not been implemented, school closures, strict social distancing, work-from-home guidance and partial sectoral shutdowns dampened LNG demand in Q1 and will continue to have an impact through Q2.

The slowdown in Q1 LNG demand was further exacerbated by high storage levels. Like 2019, Japan entered 2020 with above-average inventory levels due to a mild winter, though inventories are now within seasonal norms. The country’s Q2 2020 LNG demand is expected to fall 3 per cent to 15.8 Mt compared to Q2 2019.

Fresh out of winter heating season, China is shifting focus to industrial demand recovery. Although none of the force majeure notices were formally confirmed on LNG contracts, China reduced pipeline import growth in Q1 2020 to just 1 per cent year-on-year, with imports from the largest supplier, Turkmenistan, down 12 per cent.

Coupled with a low spot price environment, the temporary waiver of US LNG import tariffs and industrial recovery, China managed to increase LNG imports in the first three months of 2020.

Moving into summer, China is now faced with the daunting task of economic recovery. While the ‘Two sessions’ has mentioned ‘Blue Sky Defence’ will continue, it is unclear whether the government will set specific targets for coal-to-gas switching in 2020, WoodMac said.

Any moderation could reduce gas demand during the heating season. Near-term gas-power demand is risked to the downside as power demand recovery faces macro uncertainty and more coal-fired power plants are being approved. As a result, China’s Q2 2020 LNG consumption is expected to rise 12 per cent to 15 Mt year-on-year.

The other engine of LNG demand growth, India, saw Q1 2020 LNG consumption growing at record levels at 19 per cent year-on-year, driven by low spot prices. Wood Mackenzie expects this to reverse as three months of lockdown materially reduces LNG consumption. The country’s LNG demand is expected to decline 24 per cent to 4 Mt in Q2 2020 compared to the same period last year.

Lockdowns across Europe have been every bit as severe as Asia, but the total impact on gas demand is expected to be proportionally less due to the smaller share of gas used in the industrial sector, as well as the resilience of gas burn in the power sector, and largely unaffected demand from residential use.

Although Europe’s total gas demand is down in comparison to last year, reductions in domestically produced gas and Russian pipeline imports have created more room for LNG to be absorbed. However, the single largest fundamental difference from 2019 is Europe’s vast gas inventories, which currently sit at record seasonal highs and will reduce the continent’s ability to absorb global surplus LNG in Q3 2020.

Sims said, “Although already anticipated by the market, news that more than 20 US LNG cargoes had been ‘cancelled’ by contract and tolling off-takers for June loadings is significant for the market. This could lead to feedgas going as low as 5 British cubic feet per day.

“We expect under-utilisation of US terminals to continue for several summer months as margins remain negative for many companies. What is new is that our balances and price outlook suggest that some degree of under-utilisation will now also happen through summer 2021.

“Perhaps the most surprising change to our balances is the impact that low market prices are having on LNG supply, with downward revisions seen across all basins and regions.

“Should this prove to be sticky going into 2021, and we see any kind of robust rebound in LNG demand from Japan, Korea or India, then a price correction could begin earlier than previously anticipated and reduce the risk of further US supply reductions next year.”