The effects of lockdown on the gas market

To say 2020 has been a bit of a roller coaster is an understatement in every sense of the word. In the gas market, this analogy is even more relevant – with prices on a steep downward track, as the virus outbreak caused unprecedented demand destruction in a market already strongly oversupplied coming in to 2020.

Tom, one of our Traders discusses the effects of lockdown on the market and gas prices:

With the combined effects of lockdown measures closing many non-essential businesses, as well as unseasonably warm weather (Q2 2020 average over 1 degree above normal), UK LDZ demand (gas used by homes and businesses) through April to June was down almost 12% from averages of 2017-2019. Reduced electricity demand also saw gas-for-power demand fall 33% below the 3-year average. In summary, demand was down.

As noted, the market was already oversupplied – with the market on a downward trend through much of 2019. On the supply-side, pipeline supplies of gas into Europe (primarily from Russia, Norway, Algeria) did slow in response to lower demand and prices. However, LNG, which is gas cooled to a liquid state and shipped around the world, continued to arrive at record levels, with tankers turned away from buyers in Asia directed toward Europe, and with not enough demand to burn the gas, most was pumped into storage. As you can see from the graph below, North-West Europe (NWE) ended a mild winter with storage at higher levels than previous years. This, combined with the oversupply, lead to storage on track to reach capacity as early as July/August – bringing down prices.

This downward movement in prices can be seen on the second graph below. The month-ahead price is the average price of gas next month, and with so much supply and so little demand, prices hit record lows. At the end of May, UK gas prices for June were the lowest in the world for a short while. Eventually, prices fell so low that shipping LNG to Europe was no longer profitable – leading to widespread cancellations of tankers for delivery through June and July. We have now started so see the effects of this in tightening the market, and combined with the relaxation of lockdowns in Europe bringing a recovery in demand, prices have seen a rally from the lows we have seen as the pace of storage injection has slowed.

There remains no clear consensus on where the market could go next. It all depends on the pace of economic recovery and the risks of a second wave. As we have seen, prices have started an upward movement as more demand returns against tighter supply outlook in the UK and Europe, but downside risk remains should we see a second spike and lockdown reinstated, and economic activity be stifled once again. If we see a mild winter on top of this, we could again start next summer with stocks at a high level. Alternatively, 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.