Covid-19 gas market update

As we adjust to the new normal, with the most significant effects of Covid-19 and related lockdown restrictions hopefully behind us, the gas market too has begun to show some persistent signs of recovery and a return toward its own new normal.

Our last blog piece signed off by saying “if we can avoid a second spike, and the economy recovers as hoped, expect the rally to continue and 2020s discount against previous years to tighten”. Indeed, so far, the UK has managed to avoid a significant and widespread increase in cases, while the Bank of England recently stated that while recovery may not be swift, it believes that the economic shock of Covid-19 may be less severe than expected. As a result, we have begun to see 2020s discount against previous years tighten.

On this first graph, we can see the clear evidence of recovery. This shows UK LDZ (used by homes and businesses) and gas for power (burnt by power stations) demands in 2019 against 2020, as a rolling 30-day average to produce a smooth year-on-year change. You can see clearly the demand destructive effects of lockdown as well as an unseasonably warm April and May, with 2020 continuing at a significant deficit to 2019 from early April (shortly after lockdown began), dropping to a year-on-year demand reduction as much as 27%. As discussed previously, this and similar situations in Europe as well as the rest of the world widened the demand-supply gap in the market and saw prices fall as the pace of storage injections rose. However, what is also clear is how demand has recovered in recent weeks, with lockdown relaxation combining with (until last week) a relatively cool summer – we are now in a position much more in line with 2019.

From this recovery, we now see prices tightening against 2019. This second graph is similar to the first, only now comparing average gas prices on the day of delivery (SAPs) for 2019 against 2020. Again, it clearly visualises how much lower prices through 2020 have been for reasons previously discussed, reaching a year on year discount as low as -28p/th – but recently this discount has narrowed, to as tight as -7.28p/th, still below 2019, but certainly much more in-line. Despite demand recovering, greater upward flexibility on the supply side relative to 2019 should ensure this discount remains for at least a little while longer. Some supply disruptions as we have entered August have helped tighten the difference also, but further to this, the prospect of more LNG coming back into the Europe in the weeks and months ahead should also help keep the supply outlook healthy.

It would appear therefore that an upward trajectory has been set, and again provided things continue as they are we might expect the market to stay on this course. As ever, though, this remains far from certain. Instances of local lockdowns in the UK, as well some increasing case numbers in Europe and other countries including the US continue to provide some cause for concern of things re-escalating. Oil prices have been relatively slow to rise, further indicative of some caution across the general energy complex, with few seemingly willing to bet too confidently on what happens next. Much uncertainty remains.