The epidemic of COVID-19 has caused immense and unforeseen social and economic tension. Its consequences are serious and it is too early to assess results, although its duration is uncertain. The LNG business is influenced in a variety of areas, with some obstacles but still having some prospects. The LNG industry will theoretically recover from this crisis more healthily than at the beginning of this year.
The first issue that impacted LNG (liquefied natural gas) was the collapse in the prices of crude oil. Brent crude oil dropped by mid-March 2020 to USD 24.88 per bbl from USD 70 per bbl in January 2020. The inclination to USD 34 per bbl in March compared with USD 64 per bbl in January may contribute to a decline in the price of LNG contracts, but the time gap embedded for other contracts which imply that the factors do not operate before mid-year. The average is around USD 64 per bbl.
Most of the customers gained lower spot rates last year because the majority of LNG was supplied under term contracts. In December 2019, the average LNG prices were USD 9.24 per MBtu imported into Japan. The real landed price could be half of that by mid-2020. Subsequent Asian markets are emerging from the current coronavirus or COVID-19. Crisis, low prices of the LNG are likely to boost the demand in the desired market.
Experts can see iron ore alternatives in Japan and Korea for gas / LNG, but demand in South Asia could be higher. Across Europe, a constructive reaction to demand is not expected to occur. For some time now prices were low as LNG traded is linked to gas hub prices instead of oil. Shortening has contributed to the lower gas usage and this is anticipated to decline in the second quarter as Europe ends the heating season. In March, LNG imports to Italy would possibly sum to only about one-third of last year's supply level in March.
Gas industries are now experiencing fresh threats as a consequence of two events: the COVID 19 pandemics and global oil demand fluctuations as a result in the shortage of liquefied natural gas (LNG). Along with this, the existing imbalance between supply and demand in LNG markets will intensify and lengthen, contributing to a lower price setting. It could threaten, in the short term, up to 8% of global demand for LNG (over 25 million tonnes, or MTPA), whereas another one or two years could continue in the low price setting.
Current industry developments will jeopardize potential ventures and bring some firms under tremendous financial pressure including offshore gas discovery and development businesses, LNG suppliers and project developers. Meanwhile, purchasers of LNG will leverage on low rates to improve the contractual terms and facilitate the change from coal to natural gas. All companies are now checking their competitiveness and strengthening their business place in this modern world whether they maximize the gains of surplus or mitigate their disadvantages. The LNG industry controlled the effects of excess production until the COVID-19 pandemic. After 2015, global liquefaction production development peaked over 30 MTPA annually and the availability of LNG grew by about 10% each year. Markets could absorb this extra supply by a sluggish Chinese gas market growth in the early quarter of 2019 and by northeastern Asian demand contraction, pushing spot prices from 7 to 11 dollars per million British thermal units (mmbtu) in Europe and Asia to less than USD 5 per mmbtu.
The condition is predicted to escalate significantly with COVID-19. Through reducing economic growth, the pandemic has reduced the demand for natural gas in China, the second largest importer of LNG before now and the most steadily increasing LNG industry. While economic performance in China indicates a turnaround, Chinese natural gas demand growth would slip by half from previous estimates, at the annualized pace of inflation.
The lock-ins was at sights as a consequence of rising prices for shipping to global markets and fast breakeven shale economies in the Covid-19. Companies in the value chain will react quickly, evaluate their position in light of the current business climate and take advantage of the short and long-term opportunity to gain value.
In March, the Platts Gulf Coast Marker, which reflects the economies of American exports of LNG, was down below the Henry Hub. The U.S. LNG also seems vulnerable in a crisis- Asian consumers will just incur the toll payment for the cancelation of the U.S. LNG freight, whereas the cancelation of Australian or Qatar LNG freight requires the whole shipment to be billed or charged.
Major market players, similar to other LNG import companies, look unstable, this is most likely due to the contraction in business growth will lead to short-term impacts in energy production and the manufacturing companies. Early indicators in Italy have shown that after social distancing initiatives have been introduced, demand in certain sectors could have decreased in impacted regions by over 10 percent. While low LNG prices will allow some opportunities to switch to fuel in the short run, the structural and temporary existence of demand for natural gas is likely to restrict any potential upside on many markets, in conjunction with a rapidly falling overall energy demand.
In conclusion, the effect of Covid-19 on the availability of LNG would continue much longer than the effects on global demand for LNG. The U.S. has been the new epicenter for the epidemic of COVID after the move from China to Europe, as the third most populated nation in the world and the biggest natural gas user, the implementation of restrictions to reduce the spread of COVID is expected to have a significant impact. Effects on the world demand for electricity due to freezing weather from mid-March until the end of April, the rise in usage was led by an improvement in increasing the gasoline prices in the residential and business market. Whereas throughout the industrial sector gas use has been very stable and over the span has risen marginally. The energy sector seems most affected by COVID, but despite a downward trend in electricity demand, has increased gas and renewable energy production, especially coal, is offsetting energy generation from many other sources.
With the transition of Covid-19 from China to America, the USA has been the global epicenter for the COVID epidemic. The implementation of restrictions to limit the spread of COVID is expected to have a significant impact on the global gas market, is the third-largest country with the population and the largest consumer of gas. Since these restrictions in the US were enforced at the start of March, the consumption of petrol rose relative to 2019. The rise in usage is motivated by cooler weather, which raised the demand for gas in the residential and business sectors from mid-March to the end of April 2020.