“Lower oil prices, if sustained, are bad news for highly responsive US oil companies, but we are unlikely to see an impact on output growth until later in the year,” analysts at the International Energy Agency (IEA) commented.
As the novel coronavirus (Covid-19) has turned into a global public health emergency, analysts expect are lasting slowdown in oil and gas consumption in China and beyond. Demand for crude oil is expected to contract by 435 thousand barrels per day (kb/d) in the first quarter, and for 2020 as a whole the IEA has lowered its forecast by 365 kb/d to 825 kb/d.
Sluggish demand in China and a global supply overhand have had a sharp impact on prices. Brent values fell by about $10 per barrel, or 20 percent, to below $55/bbl. However, analysts remarked “the effect of the Covid-19 crisis on the wider economy means that it will be difficult for consumers to feel the benefit of lower oil prices.”
China’s gas demand could plunge up to 14 Bcm
The coronavirus health crisis has slashed China’s gas demand by 2 billion cubic metres (Bcm) by the end of the first week in February, mostly due to industry closures and quarantined workers. Anticipating a “limited resumption of economic activity,” Wood Mackenzie says full-year 2020 gas consumption could be between 6 Bcm and 14 Bcm lower.
“LNG will bear the brunt of this reduction in domestic gas demand,” analysts commented, estimating the downside impact to Chinese LNG demand as between 2.6 million tonnes (Mt) ‘best case’ with recovery by April, and 6.3 Mt in a more ‘prolonged case’ with a slower return to normal.
Prior to the coronavirus outbreak, analysts had hoped the Pacific Basin gas market would 9 Mt of the approximately 27 Mt of new supply growth in 2020. However, a mild winter had already weakened prices at the North Asian spot market before the virus stifled demand in China.
Supply correction needed
“With too much LNG, and nowhere left to place it, it looks like a supply correction is needed to balance the market,” Sims said. “We are expecting supply response in some markets like Egypt and potentially in Eastern Australia, where the likes of Shell and APLNG could attempt to sell gas into the domestic Queensland gas market.
“However, it is US Gulf producers who have the highest marginal cost of supply and the most flexibility,” he stressed, implying there might be some shut-ins of liquefaction capacity along the Gulf of Mexico.