Low oil prices expected to boost competitiveness of gas: GECF

The impact of current market conditions on gas demand is two-fold. On one hand, it can stimulate demand by increasing its competitiveness compared to other fuels, and on the other hand, reduced economic, industrial and commercial activity can reduce baseload demand, the Doha-based Gas Exporting Countries Forum (GECF) has noted.

Sustained low oil prices are expected to boost the competitiveness of gas in many Asian countries including China, Japan and South Korea. India continues to take advantage of low spot LNG prices, absorbing uncommitted cargoes that may have otherwise been bound for China, in order to suffice demand in the city-gas and power generation sectors, Sandy Singh, Research Assistant, Gas Market Analysis Department, GECF said.

Sandy said in his `expert comment’ piece that the increasing price competitiveness of gas, from both oil-linked long-term contracts and spot LNG, is expected to support coal-to-gas switching in Asia. There has been a significant drop in the NEA Spot LNG price since the start of 2020 and in February, the monthly average NEA Spot LNG price dropped below the China Qinhuangdao (QHD) coal price, which averaged $4.18/MMBtu, to a low of $2.92/MMBtu. 

As countries in Europe go into lockdown, demand for power generation has slowed.  Data from Entso-e showed that daily demand on March 16-17, 2020 were down by about 15 percent in Italy, 9 percent in France, 6 percent in the UK and 2.5 percent in Germany compared to the previous year. However, LNG sendout in Europe remained resilient in March with pipeline flows from Russia holding steady, flows from Norway increasing and storage injection starting in order to balance the system.

Prior to COVID-19 and the decline in oil prices, LNG buyers, in particular Asian buyers with long-term contracts indexed to oil, were facing a dilemma where a spot LNG cargo was readily available at almost half the price of the same LNG cargo under their long-term contract. At the same time, buyers recognized the security and sustainability of supply offered by long-term oil indexed contracts. This resulted in dissatisfaction amongst buyers and in some cases led to their willingness and interest for renegotiation, arbitration and invocation of their Downward Quantity Tolerance (DQT) in LNG contracts if possible. Over the past five years, new long-term LNG contracts have included oil-linked slopes ranging from 11-12 percent. These contracts, combined with sustained low oil prices are likely to increase buyers’ preference for oil-linked contracts.

The GECF expects that the global gas market will continue to be challenged in the short to mid-term by a glut in LNG supply, reduced gas demand aggravated by a deceleration of the economic and industrial activities worldwide, low gas prices and further uncertainty expected as the oil price war continues and the world picks up the pieces post-COVID-19.