One year on from the first lockdown and the underlying story in the gas market could not be more different. Unprecedented low demand and unseasonably high storage stocks were reflective of a very loose market through much of 2020, but after a quite chaotic winter with strong demand recovery across the globe paired with supply issues has leading to heavy utilisation of storage stocks and a much tighter outlook, 2021 is looking very different. Prices on the near curve are at a premium to those further out – a scenario known as “backwardation”, a stark contrast to last year where the near curve was trading at substantial discounts.
This first graph shows total monthly UK gas demand (LDZ, gas for power and industrial) from the beginning of 2020 to the end of February, and the percentage changes from the previous year. A mild winter 19 saw January post a year-on-year reduction of 16.6%, but the standout in the graph is the effect of last year’s lockdown, and an unseasonably mild spring – with April and May 2020 posting year-on-year demand reductions of over 20%. As summer progressed and restrictions relaxed, demand recovered, ultimately rising above levels of 2019 by August and September. Then came the cold winter – December, January and February each bringing significant cold snaps and respective year on year increases of 5.4%, 20.4% and 2.7%.
So demand recovered – but what about supply? LNG is fast becoming the key supply source globally, and the UK and Europe is a good barometer for the global market as a whole. This is because Europe has the reputation as the balancing market, or destination of last resort, for LNG. Asia is the largest demand hub for the resource, as relative to other continents more endowed with natural gas resources; Asia is much more dependent on longer-range LNG imports. As a result, Asian prices typically trade at a premium to other continental hubs, and as such, the majority of global LNG supply gravitates toward Asia. If demand and subsequently price in Asia is low, surplus supply is redirected towards the typically less profitable European hubs. This was the case through much of 2019 and 2020, but a cold winter in Asia has seen prices there spike – and subsequently, there has been less surplus for Europe to import. This was most significant in January, where UK LNG sendout was 63% lower than the previous year.
So more demand and less supply indicates a tighter market – a point well illustrated by a view of storages. The above shows UK and North-West European (NWE) storage stocks as a percentage of total capacity. The story of 2020 was a significant storage overhang from a milder winter 19, and then low demand and plentiful supply through the summer saw stocks rise rapidly and prices plummet. Gradually again though, this slowed with the demand recovery, ultimately ending the summer season roughly in-line with previous years. However, the tightness of the winter has seen significant withdrawal from these stocks (22% of capacity at time of writing), dropping stocks well below 2019 (44%) and 2020 (56%), and instead fall more in-line with 2016 (13%) and 2017 (22%). This indicates a need for significant storage injections through the coming summer to get supplies back in line for winter 21, lifting the front end of the curve above those further out – making summer 2020 already feel like a distant memory.
One year on from lockdown 1 – the outlook is completely different. Summer prices are currently trading at around 45p/th, after bottoming out below 10p last summer. There are still risks on the downside with countries in Europe experiencing rising infection rates once again and returning to lockdown. However, even assuming we did return to widespread lockdowns and demand falls once again, greater capacity for storage injections should prevent any recurrence of the historically low price environment of summer 2020.