May 2020, Vol. 247, No. 5

Ramifications of COVID-19

Pandemic Impact on Global Gas Markets May Be Short-Lived

P&GJ Staff Report

As crude oil demand and storage availability hit bottom, there are signs of hope for natural gas. 

Anna Mikulska of Rice University’s Baker Institute predicts that global demand for natural gas may drive its price recovery independent of crude oil trends.

As the COVID-19 economic slowdown edges off, Mikulska envisions natural gas demand recovering, and possibly even increasing, as the attractiveness of low-priced gas may encourage China and other countries to switch from coal at a faster pace for power generation.

“If this situation happened 10 years ago, we wouldn’t be even talking about the crisis in the natural gas trade because gas prices were set by oil. At that time, it was “whatever happens to oil happens to gas” as a secondary effect, and there were no surprises,” Mikulska told P&GJ.

“But the gas market evolved and became more liquid. It has become larger, with many more participants, and natural gas is being used more broadly,” she said. “We also now have a lot of LNG suppliers, new energy suppliers and natural gas producers and exporters bringing in gas from unconventional resources that are affected differently by the economics of oil.”

Mikulska, a nonresident fellow at Rice’s Baker Institute, believes the pandemic will affect natural gas only in the short term, noting the findings of a 2015 report produced for the U.S. Department of Energy by the institute’s Center for Energy Studies and Oxford Economics titled, “The Macroeconomic Impact of Increasing U.S. LNG Exports” on global supply and demand trends.

“There’s this whole complicated picture of what happens to natural gas prices, and COVID-19 has become one of the elements that will impact them. The short-term price war in oil also will impact it, but differently than oil used to impact natural gas,” she said. “There are some remnants of the typical oil indexing that will still impact the actual pricing of natural gas. But in order to understand market trends in natural gas prices, we have to unpack all these factors.”

For instance, Mikulska says, low prices of gas can generate higher demand, citing China’s greater likelihood of replacing coal with gas for power generation when its costs are more competitive.  Low oil prices may have a greater direct impact on the extraction of natural gas than on its price, particularly in such areas as the Permian Basin with high rates of associated gas production. 

“With a decline in oil production due to low prices, this (associated) gas is not going to be developed. And if this occurs during the period of rising natural gas demand, it can actually bring prices in Henry Hub up,” Mikulska said. “So natural gas pricing is complicated in many ways.  It’s probably more complicated than oil.”

The wide range of factors affecting price encouraged Baker Institute researchers to develop the Rice World Gas Trade Model to simulate various alternative futures for the global natural gas market.  Their output data were then input into the Oxford Economics Global Economic Model and Global Industry Model to simulate broad macroeconomic and sectoral impacts in their 2015 study.

When the economy is not doing well, prices are stalled.  But there is really nothing apparent beyond the pandemic to stop the economic recovery,” Mikulska said.  “As it recovers, we will see energy demand rise and there might be additional switching to cheap gas to push out more coal generation – or, at least not build new coal generation in Asia, just as we saw in the United States.”

The 2015 report projected somewhat soft demand for natural gas worldwide until at least the mid-2020s. “Despite these short-term effects we’re seeing now from Covid-19 and overproduction of oil, that schedule is still valid.”   

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