Gas looks to have the best growth prospects among fossil fuels, a bridging fuel for the energy transition with its low-carbon intensity on combustion.

Oil and gas companies have been poised to spend heavily on new supply to meet demand growth this decade. But the gas market has turned out to be a slow-motion car crash in 2020.

I asked Kristy Kramer, Head of Global Gas Market Research, why the market has unravelled and what the prospects are for recovery.

Why are gas prices collapsing? 

Asian spot LNG and European TTF prices are both down almost 80% in 15 months and Henry Hub has halved. There’s been a domino effect: the market was oversupplied going into winter 2019/20, the warm winter left storage facilities full – and then came coronavirus.

This was quickly followed by the collapse in the oil price and the impact of lockdowns on gas demand. Prices at today’s depressed levels are unsustainable.

How has coronavirus affected demand?

Globally, gas demand has been fairly resilient, down 2% versus 6% for oil. The stability reflects some of the big gas-consuming sectors, such as residential heating and power.

Chinese demand has still grown through the crisis; cheap gas has encouraged switching from coal in Europe and the US, with Northeast Asia likely to follow.

We’re finessing our numbers but reckon LNG demand may be around 15 million tonnes (Mt) lower in 2020 than we’d expected. Much of that will be concentrated during peak lockdown in Q2.

Has LNG supply been held back? 

We expect around 15 to 20 Mt, or 5% of global supply, will come off the market this summer, the seasonal demand low. A sizeable chunk of that volume will be US LNG as the selling price is below cash costs for some off-takers.

Will that balance the global market? 

No, though every little bit helps. The problem is that new LNG supply is coming into the market through 2020 and into 2021 from projects sanctioned in the middle of the last decade.

These volumes arrive when storage in the US and Europe is already near full. There’s a risk that, just like crude oil, gas storage in the US and Europe fills to the brim in the coming months.

Markets with limited storage and export capacity, like Canada and the UK, are at risk of severe discounts like WTI experienced in May.

Is Henry Hub under pressure?

Right now, the opposite. Domestic supply is going to fall because tight oil drilling has all but stopped and there will be less associated gas in a few months. Henry Hub has rallied in anticipation – good news for producers, but bad news for exporters because US LNG will be more expensive.

Has investment in new LNG capacity slowed?

It’s completely stopped. The industry had bet on a tighter market in the mid-2020s, reflected in record FIDs in 2019. Suddenly capital is scarce and future demand less certain. Construction has slowed on projects sanctioned last year.

Up to U.S.$150 billion of spend destined for nine projects expected to FID this year and next is now on hold. We will see new projects sanctioned in the next year; most likely, the economically robust Qatar new mega-trains. Overall, we think supply in 2027 will be 27 Mt lower than our previous forecasts.

Do you see demand recovering?

Yes – we are bullish on recovery, though it will be gradual, and growth is from a lower base. There are headwinds: slower economic growth, while low oil prices make it harder for gas to displace liquids fuels.

Asia is key. China will continue to favour domestic coal over imported gas to kick start its economy. Others, like Japan and South Korea, have an incentive to shift away from imported coal to cheaper gas.

By 2025, LNG demand may be a little lower than we forecast before the crisis, but the growth rate should be similar, driven by Asia.

What about prices?

We’ll see a strong bounce in price. The crisis has hit short-term demand more than supply. Further out, it’s the opposite. We think the market will tighten inside five years.

If demand is a little lower, the amplitude of the next price upcycle will be more moderate than we forecast pre-crisis; and it may come a little later. But Asian spot and TTF prices could still triple from today’s lows towards US$7/mmbtu – the breakeven for most of the big, yet-to-be sanctioned greenfield projects the market is going to need.

Another knock-on effect from the present halt in new projects is that there’s less risk of oversupply in the second half of the 2020s. The price curve looks set to be flatter.