Winter is coming, driving the demand for natural gas higher. Cold weather conditions resulted in a new gas consumption record in the US with a +10 per cent increase as of November 20, 2019. According to the latest EIA short-term energy outlook, natural gas storage injections in 2019 outpaced the previous five-year average, as a result of increased natural gas production.
Natural gas market outlook
Analysing natural gas in 2019, Fatih Birol, executive director of EIA, mentions, “Natural gas helped to reduce air pollution and limit the rise in energy-related CO2 emissions by displacing coal and oil in power generation, heating and industrial uses. Natural gas can contribute to a cleaner global energy system. But it faces its own challenges, including remaining price competitive in emerging markets and reducing methane emissions along the natural gas supply chain.”
Driven by China’s battle against air pollution, 2018 was considered a golden year for natural gas. Moving forward, global demand for natural gas is predicted to grow over the next five years due to strong consumption in rapidly growing Asian countries and further development of the international gas trade.
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Surge in demand for global gas and natural gas liquids (NGL)
According to EIA’s Gas 2019 report, demand for natural gas is expected to grow by more than 10 per cent over the next five years, reaching 4.3 trillion cubic metres by 2024.
China is taking the lead, accounting for more than 40 per cent of growth in international natural gas demand, as the Chinese government is aiming to improve air quality by turning away from coal. In 2018, the consumption of Natural gas in China grew 18 per cent, but this pace is expected to decrease up to 8 per cent in five years.
Experts predict a strong growth in consumption from other Asian countries. including India, Pakistan and Bangladesh, where industrial sector serves as the main growth driver.
The use of natural gas as a feedstock and fuel will expand at an annual rate of 3 per cent, accounting for half of global consumption. Power generation remains the major source of natural gas consumption, in spite of competition from coal and renewables.
The Natural Gas Liquids (LNG) market in particular will undergo significant changes. Today, India and China are major LNG importers along with a growing demand from Europe. From the supply perspective, the three major LNG exporters are the United States, Australia and Qatar.
The US and China lead production growth
The United States and China are the main contributors to natural gas supply, together accounting for more than 50 per cent of overall production growth. A global supply increase can affect the natural gas price forecast for several years ahead.
According to the EIA’s natural gas price analysis, The United States increases its average total supply of natural gas and imports more natural gas from Canada.
The World’s second largest economy is also increasing its natural gas supplies. China’s National Petroleum Corporation (CNPC) has started building one of the largest underground centres for natural gas storage in Panjin city, China. The facility will manage to store 11.5 billion cubic meters of natural gas. The construction will cost 60bn yuan ($8.5bn, £6.58bn). In general, the CNPC shared plans to build 22 more gas storage facilities by 2030.
Natural gas price prediction in winter: will natural gas prices go up?
Traders are used to thinking that cold weather is the exact time when natural gas prices go up. However, is it always true?
According to US natural gas forecast for winter 2019-2020 by the Natural Gas Supply Association, the supply and demand for natural gas during the cold season is expected to grow year-on-year. Cold winter weather plays a crucial role in commercial and residential gas demand. At the same time, production growth is expected to respond quickly to the increase in demand.
A cold winter scenario can maintain natural gas price momentum. However, if we analyse several winter seasons in a row, we will notice that natural gas not always experienced a price surge. The natural gas market can be volatile and the price can fluctuate greatly depending on milder weather conditions and geopolitical factors.
Watch a short video by Capital.com chief market strategist David Jones, making a detailed natural gas market analyses for winter 2019-2020.
Natural gas price forecast 2020
Natural gas and LNG expansion continues. According to future natural gas prices predictions by McKinsey & Company, the demand for LNG is expected to grow 3.6 per cent per year to 2035 driving the prices up.
- Gas is expected to be the fastest-growing fossil fuel, increasing 0.9 per cent per year
- Over the past 12 months, the natural gas market expanded by 5.3 per cent and the LNG segment grew at 8.6 per cent
- 35 per cent of new LNG supply capacity under construction can contribute to bullish natural gas price trend until 2025
According to the latest EIA's natural gas price projections, Henry Hub prices are expected to average at $2.73/MMBtu for the final month of 2019. Giving its prediction for natural gas prices in 2020, EIA forecasts natural gas prices to average $2.48/MMBtu, which is 13 cents lower than the 2019 average price.
A lower natural gas price forecast reflects a slowing of US natural gas export growth and decline in natural gas demand, which keeps inventories bigger than average, even regarding slower natural gas production.
Since the beginning of 2019, the natural gas price decreased $0.37/MMBtu of 12.38 per cent. Providing a long-term natural gas prediction, Walletinvestor expects natural gas prices to be down to $2.503 in a 12-month period.
Globalisation of the natural gas trade
Recently, we have seen a convergence in natural gas prices in major regions. The difference in regional prices, especially between Asia and Europe, have significantly decreased. This can be considered as an important step towards globalisation of the natural gas trade.
Although implementing market-driven pricing mechanisms in the emerging economies is still a challenging endeavour, the expansion of LNG trade is considered a positive sign for further development of sustainable trade environment and greater price convergence.
The globalisation of the natural gas trade, largely shaped by geopolitical events, will ensure that in case of a supply disruption in one country, other nations can fill the gap.