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Cautious optimism for winter gas demand

Two forecasters predict that requirements for the fuel could be higher going forward, albeit with caveats

The IEA still expects 2020 gas demand to record a significant year-on-year drop, but not to the extent it previously feared. And analysts at data firm Refinitiv also believe that this northern hemisphere winter’s demand could be better than in 2019-20, which was ravaged by warmer-than-normal temperatures and the emergence of Covid-19.

In its Global Gas Security Review 2020, the IEA revisits its June forecast, which projected a 4pc fall for global gas demand this year, and revises it up to just a 3pc drop. The more bullish number comes from estimates, based on a sample of countries and territories accounting for over 85pc of global gas demand, that the first six months of 2020—the worst affected period of the year—saw ‘only’ a year-on-year decline of close to 4pc.

Demand growth

Figures from China’s National Development and Reform Commission show that China actually posted a 4pc year-on-year demand gain, with emerging markets in Africa, Asia and the Middle East accounting for c.20pc of global gas consumption all also seeing growth. More mature markets, almost all of which are in the northern hemisphere and felt the impact of mild temperatures on their gas consumption in the first quarter, reported the vast majority of the demand loss.

“We expect LNG demand to increase by 4bn m³ this winter… led by growth in China, Japan, and South Asia” Refinitiv

The first partial figures the IEA has for the third quarter confirm a slow but continuous recovery trend, in particular in Europe, where gas-fired power generation grew by 4pc year-on-year. This greater robustness has led to the revision from 4pc to 3pc for the contraction in demand.

Nonetheless, a 3pc drop would still wipe 130bn m³ off 2020’s gas demand and represent the largest ever year-on-year fall recorded in the history of the global gas market. And some major individual markets—such as France, Italy and Spain—experienced double-digit declines in the first half of the year.

The economic slowdown resulting from Covid-19 is also a material source of uncertainty for future demand recovery, says the IEA, and has prompted a revision of any expected 2021 rebound. The agency now expects global gas demand in 2021 to recover by only 3pc, to slightly above its 2019 level, mainly due to the contribution of emerging markets.

Tighter market

Refinitiv analysts are also tentatively forecasting more demand this winter, albeit with that recovery being from the low levels brought about by last year’s mild weather. “We expect LNG demand to increase by 4bn m³ this winter… led by growth in China, Japan, and South Asia. LNG supply is expected to grow by 3bn m³ led by the US. And when we put together [that] demand and supply forecast, we expect the LNG market to be slightly tighter than last winter by 1bn m³,” its team told gas producer forum the GECF’s monthly gas lecture earlier this month.

But Refinitiv also cautions that there remain several risks to its forecasts, not least the usual caveat on temperature and the distinctly less usual wildcard of the coronavirus pandemic.

Two key demand markets that moved in different directions last year could both see their trends reverse, the analysts predict. Japan’s LNG imports declined by c.4pc due to it experiencing its mildest winter on record as well as a hit to industrial demand caused by Covid-19 in Q1 2020. This year, “while the economic recovery is still very slow in Japan, we do see the La Nina weather pattern emerging for this winter and that will mean colder temperatures than last winter, boosting demand for heating,” Refinitiv predicts.

Conversely, South Korea saw LNG imports last winter rise by c.7pc due to government policy shuttering coal-fired power plants between December and March to improve air quality—March alone witnessed 28 coal plant closures—stimulating gas-for-power demand. But Refinitiv expects the country may witness a 10pc decline in LNG imports this winter, due to higher availability of nuclear power plant and assumptions that government-mandated coal plant closures may not be as aggressive as last year.

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