Energy

Coronavirus outbreak to cause highest inventories:Strike LNG deals and come out of Crisis

Muhammad Moin
This is the COVID-19 outbreak which may cause  increasing inventories set to reach levels never seen before and a serious drop in demand in Asia, pushing natural gas prices further down.

The Henry Hub spot price averaged $2.02 MMBtu. But after the first week of February, prices had fallen to $1.86 MMBtu. Even through the remainder of the heating season, when inventories typically contract, the EIA expects natural gas prices will stay below $2 MMBtu. Prices should tick up in Q2, the EIA says, with an overall average price of $2.53 MMBtu for the year.

According to the Energy Information Administration Short-Term Energy Outlook (STEO), as inventories are expected to hover well above their five year average for the remainder of the year, natural gas prices recovery will take considerable time.

This forecast has painted gloomy picture for the industry due to lower prices that has invested. The EIA estimates that we will end the refill season, which runs until the end of October, with 4,029 billion cubic feet, that would be the largest monthly level of nat gas we have ever had in storage. 

At the end of January, inventories had already reached 2.6 trillion cubic feet.Natural gas production has shown no signs of slowing throughout 2019. In fact, in 2019, US natural gas production was at record levels, averaging 92.1 billion cubic feet per day. And 2020 isn’t looking any better.

Towards the end of 2019, average production was higher than at the beginning of 2019, so while the EIA sees monthly production declining in 2020, from 95.4 Bcf/d last month to 92.5 Bcf/d in December, the average for 2020 is still expected to be 2% higher than the average of 2019.

January 2020 was the fifth warmest January on record—that’s out of over 125 years of data. January 2020 saw average temperatures of 35.5 degrees F across the United States. This is 5.4 degrees more than the 20th Century average, according to the US Department of Commerce’s National Oceanic and Atmospheric Administration.

It’s just been so warm that the need for heating has been reduced, depressing demand. And while production has not fallen with demand, inventories have bloomed. Add to that unfavorable price scenario the fact that COVID-19 is spooking the market and further denting demand, and you have a perfect storm for lower natural gas prices.

While weather has been the primary driver of the lower natural gas prices, COVID-19 is worth a mention. The virus is expected to strip away 10bn m3 from China’s 2020 gas demand alone, according to Sublime China Information. Most of this demand destruction will be seen in Q1. For China, some are expecting gas demand to return to normal by March, if things don’t get worse—a condition that public health officials are saying is likely to happen.

This weather phenomenon combined with robust production is tanking the price of natural gas. The Henry Hub spot price averaged $2.02 MMBtu. But after the first week of February, prices had fallen to $1.86 MMBtu. Even through the remainder of the heating season, when inventories typically contract, the EIA expects natural gas prices will stay below $2 MMBtu. Prices should tick up in Q2, the EIA says, with an overall average price of $2.53 MMBtu for the year.

Whether its weather or COVID-19, record inventories for natural gas are likely on their way. And with record inventories comes low prices—a fact that offers traders about as much certainty as they’re going to get in this volatile marke.

Opportunity for Pakistan

At present, gas sector is in crisis as LNG has become uneconomical for Pakistan’s different sectors due to agreements signed at higher rates during previous government. Government is out of business now as customers are not ready to lift imported Commodity.

PTI government has opened LNG market for private sector. According to analysts the private sector should be encouraged to secure LNG deals at lowest rates. This will help to make the current LNG economical for the country.

Enough time has passed since government had allowed private sector to import gas. However, private sector blames that government entities had caused creating bottlenecks in importing LNG and not a single ship by private sector had landed in Pakistan.

Five private parties including US energy giant ExxonMobil are also working on LNG projects and these parties should secure LNG deals at lower prices that would boost the dwindling economy of the country. 

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