Taking Stock, Literally and Figuratively
Before COVID-19 disrupted commodities markets, gas already had issues, with sentiment and fundamental concerns impacting US natural gas prices. I expect a significant demand impact, particularly in the near and medium term, while oil-driven supply-side implications, in my view, apply more to the medium to long term. This mismatch of supply and demand could make the natural gas market an easy one to write off, but the effects of the oil price rout and the OPEC+ agreement as well as the pandemic will be a longer-term theme to deal with.
Trade: LNG Expectations and Risks
Regarding LNG, there are several risks. First, that a further fall of global demand, with Europe in particular facing challenges, making it difficult for US feedgas volumes to be able to sustainably retain the highs seen over the last month of over 9 Bcf/d, even as shipments to China materialize. The risk for large-scale shut-ins has increased, and construction timelines for export projects are also under threat. Pipeline shipments are not without their risk, either. While Canada could plug some gaps for US balances in the coming year, Mexico, the US’s key pipeline export market, is unlikely to surpass highs currently.
Demand Side: Undergoing a Gut Punch
In the US, schools, offices, and retail establishment closures are weighing on total electricity output - our lead US power and utility equity analyst said it hit five-year lows in multiple regions and forecasts a 5–7% annual decline in 2020, a slowdown into Q2, and improvements later in the year. Industrial demand is also worrying and the shape of an eventual recovery really matters for this sector, but of residential and commercial demand, it is commercial demand that is unsurprisingly bearing the brunt, even in weather adjusted terms.
While much of these demand and trade concerns are set to weigh heavily on prices over the course of 2020 in particular, the impact of a challenging oil price environment means that much of the associated gas supplies that many expected, are no longer likely. Thus, after a period of even more weakness for US natural gas prices, there may be a shift and some respite coming over the longer term.