Executive summary

Winter has come, yet gas demand recovery remains fragile for 2021

After an unprecedented drop in natural gas demand 2020 closed with a rapid recovery in gas prices as a rise in winter demand tightened supply. A similar pattern held in the first weeks of 2021 with cold snaps bumping gas prices in Europe to their high winter levels and spot LNG prices in Asia broke historical records. This tight market episode was driven by short-term factors, whereas the fundamentals remain uncertain and potentially challenging for global gas demand recovery in 2021.

Global gas markets experienced their largest recorded drop in 2020, with an estimated 2.5% year-on-year (y-o-y) decrease in consumption (about 100 bcm).This was triggered by exceptionally mild weather in the early months and the onslaught of the Covid-19 panademic; impacts were concentrated in the first-half of the year which saw a 4% y-o-y decline in global gas demand. Progressive recovery was observed in Q3 as lockdown measures eased, seasonal electricity demand pushed up demand along with competitive gas prices. However, the beginning of the heating season in the northern hemisphere was less supportive with very mild temperatures in Europe and North America in October and November.

A cold open to 2021

Colder temperatures in December 2020 marked the start of a gas price rally amid tightening LNG supply. Spot LNG prices in Asia more than tripled to above USD 30/MBtu by the start of January 2021, with some cargoes reportedly awarded close to USD 40/MBtu; breaking the record price levels in the aftermath of the Fukushima nuclear accident in 2011. Rather than a single event, the recent spike reflects a combination of supply and demand factors. LNG demand in northeast Asia increased 10% y-o-y between mid-December 2020 and early January 2021 due to colder than average winter temperatures, exacerbated by lower nuclear availability in Japan and limits on coal-fired generation in Korea. The rise in LNG demand in Asia coincided with a number of outages at regional liquefaction plants, which increased the call on more remote suppliers. Longer voyages and congestion at the Panama Canal spiked spot charter rates to historical highs of more than USD 230 000/day – reportedly one prompt vessel was contracted at USD 350 000/day.These price spikes are not expected to last beyond the short-term cold wave, as market fundamentals for 2021 remain fragile.

Under pressure

This forecast expects global natural gas demand to grow 2.8% in 2021 (about 110 bcm), slightly above the 2020 decline, thus enabling a recovery to the 2019 level. This is a far cry from the 7.5% y-o-y post-2009 financial crisis rebound observed in 2010. This projection comes with two main caveats:

  • All regions are not equal when it comes to gas market recovery. Mature markets bore the brunt of demand drop in 2020, while emerging markets will be the main drivers of demand growth in 2021. Fast-growing markets in Africa, Asia, Central and South America and the Middle East are projected to account for about 70% of global demand growth in 2021. Mature markets are likely to see a more gradual recovery though some may remain below their 2019 demand levels.
  • The sectoral pillars of growth are all subject to major uncertainties. Gas burn in power generation is expected to be hampered by slow electricity demand growth and increasing inter-fuel competition as gas prices recover from their 2020 lows. Gas consumption in the industry is strongly dependent on economic recovery, especially for Asia’s export-driven industries. Residential demand received support from cold temperatures so far, but would be negatively impacted in case of a return to milder weather conditions.

Global gas demand recovery in 2021 is uncertain. Demand is subject to a variety of risk factors including fuel switching, slow industrial rebound and mild weather which can moderate consumption.