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Oil and gas markets brace for impact of pandemic’s second wave

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The coronavirus pandemic has already had far-reaching consequences for global energy demand. Lockdown measures imposed around the world shuttered businesses and severely curtailed freedom of movement. The impact on consumption of fossil fuels and power demand was immediate. As lockdowns began to ease around the world, demand started to recover. However, the risk of a second wave of coronavirus is increasing, and with it, fresh lockdowns appear likely. These could deepen the global recession.

What would a new wave of lockdowns mean for oil and gas markets? And what are the implications for industry stakeholders?

Dulles Wang, Director, Americas Gas Research at Wood Mackenzie, says: ‘Our 1H2020 outlook anticipates an oil price rebound as demand starts rising post-coronavirus. However, a second large-scale lockdown would deepen the recession, and possibly delay any rebound in GDP until 2022. This would have a significant impact on the oil and gas sectors. In our base case forecast, Brent rises to $86/b annual average in real terms by 2030. In a coronavirus-lockdown second wave (CSW) scenario, this falls to $70/b.’

Wang says that global gas demand has proved to be relatively resilient this year. As lockdowns began to ease, demand began to recover relatively swiftly. But this recovery is inextricably linked to the economic outlook, and a second wave would take its toll.

He says: ‘Our Global Gas Model Next Generation (GGM NG) shows that a second wave of large-scale lockdowns would result in global gas demand reducing by 4.5% in 2020 (versus 2019). Global LNG demand would also fall, putting further pressure on Europe to absorb the LNG oversuppply – and causing further delays to LNG projects under construction. Pre-FID projects could become even more challenged as the need for new LNG supply could be stalled. Low-cost gas production – namely Russian pipeline gas in Europe and Qatari LNG – would be a key driver for prices. In North America, LNG under-utilisations could become a recurring theme, with full utilisation not expected until the end of 2020s. However, supply flexibility between associated and dry gas plays would absorb much of the demand shock from lower economic activity level. Some parts of the supply landscape, such as production from dry gas plays, could be surprisingly unscathed coming out of the second wave of lockdowns.’

Wang adds that fresh lockdowns could prompt a further decline in North American domestic demand, led by the industrial and power sectors.

As power demand is price sensitive, rising gas prices post-2022 are likely to compound the reduction in structural demand caused by lower GDP forecasts, reports Wood Mackenzie. The energy transition is weighing heavily on industry strategy and could deter some investment, especially as the sector grapples with tight budgets and low oil prices. Lower 48 operators, for example, were already under pressure when the oil price crashed, and many have since been under significant financial distress.

‘A second wave of lockdown measures would only increase the pressure,’ Wang says. ‘Building resilience could be more crucial than ever for many industry players. But US gas producers could be better placed than most to manage this, as the lower oil price – and therefore loss of associated gas production – insulates Henry Hub prices from demand losses.’

However, the overall size of the North American gas market shrinks by 6.5bn cf/d in Wood Mackenzie’s CSW case as Henry Hub rebalances between supply pullback and demand and export reduction.

Wang adds: ‘While subdued tight oil production would provide headroom for non-associated gas producers, ensuring sustained long-term profitability for lower-cost producers, one crucial question remains – can gas producers survive another year of low gas prices?’

Figure 1: Brent prices – base case forecast versus coronavirus-lockdown second wave scenario
Source: Wood Mackenzie

News Item details


Journal title: Petroleum Review

Subjects: Oil and gas - Oil markets - Gas markets - COVID-19 - Forecasting -

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