Oil and gas markets brace for impact of pandemic’s second wave: Wood Mac

9630416827 ec2a31457d cDulles Wang, director, Americas gas research at Wood Mackenzie, said the company’s H1 2020 outlook anticipates an oil price rebound as demand starts rising post-coronavirus, but a second large-scale lockdown would deepen the recession, and possibly delay any rebound in GDP until 2022

“In our base case forecast, Brent rises to US$86 per barrel annual average in real terms by 2030. In a coronavirus-lockdown second wave (CSW) scenario, this falls to US$70 per barrel,” he added.

Wang said global demand for gas this year has proved relatively resilient. As lockdowns began to ease, demand recuperated relatively quickly. But the economic outlook is inextricably linked to this recovery and a second wave would take its toll.

“Our Global Gas Model Next Generation (GGM NG) shows that a second wave of large-scale lockdowns would result in global gas demand reducing by 4.5 per cent in 2020 (vs 2019). Global LNG demand would also fall, putting further pressure on Europe to absorb the LNG oversupply – and causing further delays to LNG projects under construction,” he noted.

He said that the Pre-FID projects might become even more challenging as the need for new supply of LNG could be stalled. Production of low-cost gas-namely Russian pipeline gas in Europe and Qatari LNG-would be a major driver for prices.

“In North America, LNG under-utilisations could become a recurring theme, with full utilisation not expected until the end of 2020s. However, supply flexibility between associated and dry gas plays would absorb much of the demand shock from lower economic activity level. Some parts of the supply landscape, such as production from dry gas plays, could be surprisingly unscathed coming out of the second wave of lockdowns.” he explained.

He added that fresh lockdowns could spur a further decline in domestic demand in North America, led by the industrial and power sectors. Given that power demand is price sensitive, rising gas prices post-2022 are likely to compound the reduction in structural demand caused by lower GDP forecasts.

The energy transition weighs heavily on industry strategy, and could dissuade some investment, particularly as the sector is struggling with tight budgets and low oil prices. For example, when the oil price crashed, the lower 48 operators were already under pressure, and many have since been in considerable financial distress.

“A second wave of lockdown measures would only increase the pressure,” Wang said. “Building resilience could be more crucial than ever for many industry players. But US gas producers could be better placed than most to manage this, as the lower oil price – and therefore loss of associated gas production – insulates Henry Hub prices from demand losses.”

However, the overall size of the North American gas market shrinks by 6.5 bcf per day in the CSW case as Henry Hub rebalances between supply pullback and demand and export reduction.

“While subdued tight oil production would provide headroom for non-associated gas producers, ensuring sustained long-term profitability for lower-cost producers, one crucial question remains: can gas producers survive another year of low gas prices?,” Wang concluded.

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