Softening demand that emerged last year combined with the ‘demand destruction’ caused by the Covid-19 pandemic have created headwinds that will depress the global LNG market into 2021
“LNG is being hit by two competing storms that are having a significant impact,” said Poten & Partners global head of business intelligence Jason Feer during a recent podcast. “First, the demand destruction we are beginning to see caused by the Covid-19 outbreak. That is on top of the softening demand that pre-dated the outbreak.” Mr Feer said that layered on top of this are very high storage levels in Europe and China, and a very mild winter.
“Last year there was a surplus of LNG, but storage space was available. Now there is depressed demand and storage levels are full,” he pointed out. That means there are fewer places to park surplus LNG.
Mr Feer observed that while Chinese economic activity is picking up, it will take some time to recover because major consumer markets in the US and Europe are shut down amid the Covid-19 pandemic. “LNG demand in Spain is expected to be down 10% in April and possibly more in May and Italy is even worse, down 23%,” he said.
As a result, Poten & Partners expects some new LNG projects will be delayed and FIDs on others will be deferred.
“It is very clear to us that there is going to be some kind of supply response needed to balance the market”, said Mr Feer. He expected that supply response will most likely land squarely on the shoulders of US LNG export facilities, translating into possibly some liquefaction train capacity being shut in. Also, with capex being cut, progress on LNG projects under development will slow and FIDs on new ones will be deferred, such as in the case of Woodfibre LNG in British Columbia and Santos’ Barossa backfill project in Australia.
“We expect global demand growth or demand will be depressed outright by the Covid-19 outbreak,” said Mr Feer.
“Our best-case scenario envisions a 0.5% growth in 2020 and slightly more in 2021. He said that assumes the outbreak has wound down by summer and there is a robust bounce-back in economic activity. Poten & Partners’ LNG Market Outlook projects LNG demand will rise from 363M tonnes in 2019 to 365M tonnes in 2020 and 369M tonnes in 2021.
A gloomier view of global demand will see it drop of 4.7% to 347M tonnes in 2020, edging up to 351M tonnes in 2021.
Those looking to China to be a saviour will be disappointed, Mr Feer pointed out. Poten’s best case scenario sees flat demand of 61M tonnes in 2020, with a modest growth of about 5% to 64M tonnes in 2021. Compounding the LNG market’s woes will be the collapse in oil prices that will make pipeline natural gas imports far more competitive with LNG. As a result, China’s LNG demand could fall to 57M tonnes in 2020 and rise modestly to 60M tonnes in 2021, still below 2019 levels.