European winter demand has room to rebound
The continent could take a lot more gas this winter. But not if we return to lockdown
European gas demand over winter 2020–21 should be set for substantial year-on-year growth simply on a reversion to seasonally normal cold weather, given the particularly mild winter of 2019–20. And a change in working habits—involving many traditionally office-based staff continuing to work from home—should actually further boost demand.
But this expected rebound could be wiped out in a scenario where Europe again goes into widespread lockdowns to contain a resurgent spread of Covid-19.
We expect aggregate European gas demand this winter to increase by c.14bn m³ year-on-year from heating demand rising into line with the ten-year average. That demand growth comes mostly from space heating in the residential and commercial (res-com) sector, but also from heating industrial sites as well as higher power sector gas consumption for electric heating.
Additional winter gas demand growth is likely to come from a greater heating load per heating degree day. We expect that workforces being split between office and home environments—owing to businesses offering flexible working arrangements—will boost the aggregate call on heating.
Up to 12bn m³ – Q4 drop in gas demand if lockdowns return
A study of UK heating conducted in 2013 showed that c.50pc of homes are typically unheated during the working hours of 0900–1600, and we think many more of those homes are likely to be heated this winter than a year earlier.
Mobility data across Western Europe, provided by Google, indicate that there was still a 26pc drop in time spent in workplaces in early September compared with a pre-Covid-19 baseline in January. This extra demand is difficult to quantify, although a 5pc increase in heating load would boost year-on-year res-com gas demand growth in Western Europe alone by an additional 2.5bn m³.
But an expected increase in demand from weather normalisation could be fully offset by European governments reinstating lockdown policies similar to those seen in the second quarter. Our modelling of industrial, power sector and res-com gas demand in five western European countries suggests that up to 12bn m³ of gas demand would be lost over Q4 2020 against our weather-normalised forecast if they went into lockdowns similar to those seen in Q2 2020.
Power would be hit the heaviest in absolute terms, with a 4.7bn m³ loss. Industry would be second, with a 3.9bn m³ loss, and res-com would be third, with a 3.4bn m³ loss. Our estimate is based on the weather-adjusted impacts we observed on the three main demand sectors over Q2 2020, which broke down as a 13pc year-on-year downturns in both power sector and industrial gas demand and a 7pc year-on-year downturn in res-com demand.
The weight of those demand losses was heaviest at the start of the quarter, particularly for industry. Efforts to restart European industry softened the year-on-year losses in industrial gas demand substantially over May and June.
Similarly, adjusted res-com year-on-year demand destruction also faded over the quarter and was negligible in June. Notably, the actual year-on-year losses for res-com were even greater because the weather was mild in April-May.
We observed more consistent losses in power sector gas demand over the three months, likely owing to many commercial buildings—particularly in the hospitality sector—remaining closed over much of the quarter. Our estimate assumes the same level and pattern of demand destruction seen in Q2 2020 occurring in Q4 2020.
The later a start to any European lockdown, the likelier an even greater year-on-year loss of demand. Res-com demand was down year-on-year in Q2 2020 because the loss of commercial heating more than offset the increase in household heating from home workers reaching for the thermostat.
This means that a lockdown occurring deeper into winter—when the heating load is greater—is likely to be more destructive for gas demand and fully offset our expected increase from weather normalisation in our base case.
The later a start to any European lockdown, the likelier an even greater year-on-year loss of demand
Rising Covid-19 infections across a few European states are making a repeat lockdown more likely over the coming months, but it is still not our base case for this winter. Governments across Europe would struggle to deploy the same fiscal stimulus to counteract the economic downturn from another major lockdown.
Given the fragility of Europe’s economic recovery, there is little political will to impose lockdowns again, and Germany and Italy have appeared to rule them out entirely. Behavioural changes have helped in slowing the spread of the virus, and governments are betting on testing and tracing measures to isolate local outbreaks before they proliferate.
Importantly, the rate of fatalities also appears much lower than when Europe went into lockdown the first time, easing popular pressure on governments to act. That said, a major Covid-19 outbreak occurring over the European flu season could add significantly to the number of hospital admissions and put more strain on healthcare systems than experienced in Q2 2020.
Despite strong reluctance to reimpose lockdowns, they could become a political necessity if fatalities start to rise. And even localised lockdowns, if sufficiently widespread, would cause major losses in European gas demand.
James Waddell is a senior global gas analyst at Energy Aspects