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How natural gas is withstanding the energy market collapse


Natural gas is withstanding the coronavirus-fueled economic crash in a way that its closely associated relative, oil, isn’t.

Oil prices have reached record lows, with the U.S. benchmark oil price briefly dropping below zero last month after trading at around $60 per barrel at the start of 2020.

The U.S. natural gas price, meanwhile, is stable, staying below $2 per million British thermal units, or MMBtu, a historically low level it has been hovering at for a while due to a glut produced from the shale boom.

Oil producers are shutting in their wells, prompting tens of thousands of layoffs, because the pace of the price collapse was so sudden, caused mostly by the fact that the pandemic has crushed demand for transportation fuels made with oil, as people forgo driving and flying.

“The negative impact on demand in gas markets is not as significant as it is with oil because it’s not being driven by transportation,” said Dustin Meyer, director of market development at the American Petroleum Institute, the largest U.S. oil and gas lobbying group.

U.S. natural gas production, by contrast, has remained steady as people stuck at home depend on it for power and heat. Because it’s been so cheap for so long, natural gas in recent years passed coal as the most used fuel for electricity, at 38% of the mix in 2019.

While some important uses for gas are falling, without the need to power or heat large office spaces and some nonessential manufacturing facilities, demand has picked up in other places, such as in feedstock for plastics used to make key health equipment.

“Instead of seeing a very low price market or negative pricing like we did with oil, you are seeing something that looks like price stability or even resilience with natural gas because its primary end use in this country hasn’t changed all that much,” said Kevin Book, managing director of the research group ClearView Energy. “Most of America doesn’t understand how much of its electric power comes from natural gas, and the masks, gloves, and gowns they are so focused on are also coming from natural gas.”

Natural gas still faces some near-term and long-term challenges.

U.S. natural gas demand is falling, just not as severely as oil. It dropped 4.5% in the first quarter of 2020 compared to the first quarter of 2019, the International Energy Agency projected this week. While people are using more power at home, that can’t compensate for shutting down larger commercial centers.

“I don’t care how many times you run the microwave each day,” Book said.

Globally, natural gas demand could decrease by 5% in 2020, the IEA said, which would be the first drop in annual consumption since 2009.

Natural gas use in the United States was already down before the pandemic because of a mild winter that meant less heating of homes and businesses.

U.S. gas production is also beginning to decline, dropping 0.3 billion cubic feet per day in the final 10 days of last month compared with April 1-20, according to S&P Global. Most U.S. natural gas is considered “dry,” meaning it’s produced alone without oil in places such as the Marcellus Formation in Pennsylvania. A smaller amount of natural gas is produced as a byproduct of oil drilling. That so-called “associated” gas production tied to oil is expected to fall as producers shut down oil wells in the Permian Basin straddling West Texas and New Mexico.

“We are expecting to see a significant decline in associated gas production because of what is happening in oil pricing,” said Erin Blanton, a senior research scholar at Columbia University’s Center on Global Energy Policy focused on natural gas.

Another key metric for the health of natural gas is demand for LNG, the chilled, liquid form to which gas must be converted for shipment in giant tanker vessels across the sea. The U.S. has become a top exporter of LNG, a significant development touted by the Trump administration after the U.S. was expected to become a big importer of gas before the shale boom. But that momentum could be threatened by the coronavirus since large consumer markets such as Western Europe and East Asia are also suffering economic slowdowns.

The research group IHS Markit expects global LNG demand to fall 3.8% in 2020 relative to its pre-pandemic outlook after LNG consumption has grown every year since 2012. Cheniere Energy, the biggest U.S. LNG exporter, has seen customers cancel cargoes.

But IHS Markit said it expects LNG demand to show “impressive resilience” given the circumstances. Prices in Europe and Asia also collapsed to record levels during the mild winter.

Those low prices could enable Asian countries such as South Korea and China that have been slower to break from coal to make the switch to cleaner-burning natural gas, said Meyer of API.

“Coming out of this pandemic, it will give a lot of countries for the first time the opportunity to look at natural gas as a viable component of their longer-term energy future,” Meyer said.

Natural gas consumption in electricity should pick up relatively quickly once offices and stores open, whereas transportation demand could still lag since people will only drive and fly when they are comfortable doing so.

“Electricity demand is clearly going to come back more strongly than transportation demand,” said Paul Bledsoe, an adviser at the Progressive Policy Institute who was a climate adviser under former President Bill Clinton. “So, the outlook for gas is much better than for oil in the near term.”

Looking farther out, natural gas prices could rise as production falls in oil basins, with the U.S. gas futures trading at more than $3 per MMBtu for January 2021.

If prices even rise slightly, that could be good for sources of renewable energy, whose prices are falling and increasingly competitive with gas. Renewable electricity generation will increase by 5% globally in 2020, the only energy source that will grow this year, the IEA projected.

“At some point, gas prices will increase,” said Dennis Wamstead with the Institute for Energy Economics and Financial Analysis. “When that happens, we don’t turn back to coal. We move more quickly toward renewables.”

Analysts, however, expect there to be a “ceiling” for gas prices with such a glut of supply, meaning it should be able to maintain its position.

“It seems very unlikely that gas’s trajectory in the power sector is going to change significantly once the pandemic passes,” Meyer said. “The value proposition of natural gas is so persistent not just in the U.S., but around the world.”

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