Global LNG Demand to Dip 1st time Since 2012: WoodMac

The global LNG industry is expected to see its first seasonal demand contraction since 2012, with demand in summer 2020 expected to fall 2.7% or 3mn metric tons yr/yr, Wood Mackenzie said on June 2.

Lockdown measures and negative economic outlook stemming from the coronavirus pandemic has taken its toll on Asian LNG importing countries, resulting in the second consecutive year of sluggish LNG demand growth, it said.

"Covid-19 will drive a global contraction in LNG deliveries through summer 2020 compared to the previous year. This will be the first seasonal contraction in eight years,” WoodMac research director Robert Sims said. "The coming winter season (2020-21) could see a modest 5mn mt improvement in global LNG demand compared to the previous winter season.”

Sims said that pricing dynamics between both seasons are also likely to be similar, with the cross-basin spread set by the economics of US LNG. There could be some downside risk to Asian prices this winter if buyers lift some of the deferred volumes from this summer. "In general, a return to stronger growth is not expected until mid-2021."

Japan, the world's largest LNG importer, saw LNG demand decline in the first quarter of this year, and imports continued to fall through April as the coronavirus outbreak continued to spread. Although full-scale lockdowns have not been implemented, school closures, strict social distancing, work-from-home guidance and partial sectoral shutdowns dampened LNG demand in Q1 and will continue to have an impact through Q2, WoodMac said.

The slowdown in Q1 LNG demand was further exacerbated by high storage levels. Like 2019, Japan entered 2020 with above-average inventory levels due to a mild winter, though inventories are now within seasonal norms. According to WoodMac, the country's Q2 2020 LNG demand is expected to fall 3% yr/yr to 15.8mn mt.

Coupled with a low spot price environment, the temporary waiver of US LNG import tariffs and industrial recovery, China managed to increase LNG imports in the first three months of 2020. WoodMac expects China's Q2 2020 LNG consumption to rise 12% yr/yr to 15mn mt.

The other engine of LNG demand growth, India, saw Q1 2020 LNG consumption growing at record levels at 19% year-on-year, driven by low spot prices. WoodMac expects this to reverse as three months of lockdown materially reduces LNG consumption. The country's LNG demand is expected to decline 24% yr/yr to 4mn mt in Q2 2020.

Lockdowns across Europe have been every bit as severe as Asia, but the total impact on gas demand is expected to be proportionally less due to the smaller share of gas used in the industrial sector, as well as the resilience of gas burn in the power sector, and largely unaffected demand from residential use, WoodMac said.

Although Europe's total gas demand is down in comparison to last year, reductions in domestically produced gas and Russian pipeline imports have created more room for LNG to be absorbed. However, the single largest fundamental difference from 2019 is Europe's vast gas inventories, which currently sit at record seasonal highs and will reduce the continent's ability to absorb global surplus LNG in Q3 2020.

"Although already anticipated by the market, news that more than 20 US LNG cargoes had been 'cancelled' by contract and tolling off-takers for June loadings is significant for the market. This could lead to feedgas going as low as 5 British cubic feet per day.” Sims said. "We expect under-utilisation of US terminals to continue for several summer months as margins remain negative for many companies. What is new is that our balances and price outlook suggest that some degree of under-utilisation will now also happen through summer 2021."

He said that the most surprising change to the balance is the impact that low market prices are having on LNG supply, with downward revisions seen across all basins and regions.

"Should this prove to be sticky going into 2021, and we see any kind of robust rebound in LNG demand from Japan, Korea or India, then a price correction could begin earlier than previously anticipated and reduce the risk of further US supply reductions next year," Sims said.