IEEJ © 2020, All rights reserved...Ken Koyama, IEEJ, April 27 th, 2020 Gas/LNG demand reduction versus 2020 level Natural gas LNG-150 -100 -50 0 OECD Americas OECD Europe OECD Asia

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IEEJ © 2020, All rights reserved

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Ken Koyama, IEEJ, April 27th, 2020

Even before pandemic, energy market sees over supply

COVID-19 outbreak in China developed into pandemic

World economy, the worst since the Great Depression

Lockdown destruct oil demand: demand shock

Supply shock added another pressure when joint production cut collapsed

Unprecedented oversupply and extreme low price

Pain and terror resulted in restoration of joint cut, but…

Emerging inventory bottleneck gives downward pressure

Supply glut and uncertainty will be the keyword

Energy market under demand and supply shock

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Oil price plummeted under COVID-19 pandemic

Source: NYMEX and other data

0

20

40

60

80

100

120

140

Jan

-07

Apr

-07

Jul-

07

Oct

-07

Jan

-08

Apr

-08

Jul-

08

Oct

-08

Jan

-09

Apr

-09

Jul-

09

Oct

-09

Jan

-10

Apr

-10

Jul-

10

Oct

-10

Jan

-11

Apr

-11

Jul-

11

Oct

-11

Jan

-12

Apr

-12

Jul-

12

Oct

-12

Jan

-13

Apr

-13

Jul-

13

Oct

-13

Jan

-14

Apr

-14

Jul-

14

Oct

-14

Jan

-15

Apr

-15

Jul-

15

Oct

-15

Jan

-16

Apr

-16

Jul-

16

Oct

-16

Jan

-17

Apr

-17

Jul-

17

Oct

-17

Jan

-18

Apr

-18

Jul-

18

Oct

-18

Jan

-19

Apr

-19

Jul-

19

Oct

-19

Jan

-20

Apr

-20

Jul-

20

Oct

-20

(US$/bbl)

Continued price runups

S

Rebound from the

MENA crisis

Brent

WTI

Collapse after Rehman shock

WTI hit 26$ in Feb 2016

OPEC decision to leave price fall

OPEC Plus cut output

Brent topped 80 $Demand

shock

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IMF「World Economic Outlook」

Source: IMF “World Economic Outlook” (April 2020)

2020 2020

January April

World 3.2 3.2 3.8 3.6 2.9 3.3 -3.0

OECD 2.1 1.7 2.4 2.2 1.7 1.6 -6.1

US 2.6 1.5 2.2 2.9 2.3 2.0 -5.9

Euro zone 2.0 1.8 2.4 1.9 1.2 1.3 -7.5

Japan 1.2 0.9 1.9 0.3 1.0 0.7 -5.2

Non-OECD 4.1 4.4 4.7 4.5 3.7 4.4 -1.0

China 6.9 6.7 6.9 6.6 6.1 6.0 1.2

India 7.6 7.1 6.7 6.8 4.8 5.8 1.9

2015 2016 2017 2018 2019

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Well-functioning of “people”, “goods” and ”money” is essential for economic activities

COVID-19 pandemic: Serious problems for “people” and “goods”: damaged real economy

Then “money” problem hit the world, leading to vicious cycle

Rehman shock 2008-09 financial crisis: Rehman Brothers bankrupted: “money” caused financial crisis

Then real economy damaged worldwide

US-China trade war: Tariff war: “goods” problem caused reduction on world trade

Then “money” problem damaged the world economy

Economic crisis: “people”, ”goods” and "money"

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World economy contracted by 3%

World GDP growth

Source: Koyama and Suehiro (IEEJ, April 2020)

GDP trend by quarter

90

92

94

96

98

100

102

2019Q4 2020Q1 2020Q2 2020Q3 2020Q4

2019Q4=100

Reference Longer Pandemic

3.8% 3.6%2.9%

-3.0%

-6.0%

-8%

-6%

-4%

-2%

0%

2%

4%

RS LPS

2017 2018 2019 2020

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World oil demand Oil demand by quarter

Oil demand under COVID-19 pandemic

98.1 99.2

100.0

90.7

87.2

80

84

88

92

96

100

104

RS LPS

2017 2018 2019 2020

Mb/d

72

76

80

84

88

92

96

2020Q1 2020Q2 2020Q3 2020Q4

Mb/d



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By region By product

Oil demand reduction versus 2020 level

-4 -3 -2 -1 0

OECD Americas

OECD Europe

OECD Asia Oceania

FSU & Other Europe

China

Other Non-OECD Asia

Non-OECD Americas

Middle East

Africa

Mb/d

Reference

Longer Pandemic

-4 -3 -2 -1 0

LPG & ethane

Naphtha

Gasoline

Jet & kerosene

Gasoil

Residual fuel

Other products

Mb/d


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Natural gas demand Natural gas demand by quarter

Natural gas demand under COVID-19 pandemic

3654

3849

3969

3682

3566

3400

3500

3600

3700

3800

3900

4000

RS LPS

2017 2018 2019 2020

Bcm

600

700

800

900

1000

1100

1200

2020Q1 2020Q2 2020Q3 2020Q4

Bcm



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LNG demand LNG demand by quarter

LNG demand under COVID-19 pandemic

288

316

353

325

312

260

280

300

320

340

360

RS LPS

2017 2018 2019 2020

LNG-Mt

50

60

70

80

90

100

2020Q1 2020Q2 2020Q3 2020Q4

LNG-Mt



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Gas/LNG demand reduction versus 2020 level

Natural gas LNG

-150 -100 -50 0

OECD Americas

OECD Europe

OECD Asia Oceania

FSU & Other Europe

China

Other Non-OECD Asia

Non-OECD Americas

Middle East

Africa

Bcm

Reference

Longer Pandemic

-20 -15 -10 -5 0

OECD Americas

OECD Europe

OECD Asia Oceania

FSU & Other Europe

China

Other Non-OECD Asia

Non-OECD Americas

Middle East

Africa

LNG-Mt


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Energy demand reduction by “Lockdown” (1)

Source: Suehiro and Koyama (IEEJ, April 2020)

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Energy demand reduction by “Lockdown” (2)

-3.4

by sector

residential

industry

commercial

transport

-3.4 -4

-3

-2

-1

0

1Mtoe/d

by energy

oil

gas

coal

electricity

Final energy reduction

Primary energy reduction

-18.1

(-19.7%)-20

-15

-10

-5

0

Oil (Mb/d)

-1.1

(-10.7%)

-2.0

-1.5

-1.0

-0.5

0.0

Gas (Bcm/d)

-4.1

(-11.4%)

-8

-6

-4

-2

0

Total (Mtoe/d)

-1.2

(-8.1%)

-4

-3

-2

-1

0

Coal (Mtce/d)

Source: Suehiro and Koyama (IEEJ, April 2020)

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Supply shock: Collapse and restoration of joint production cut

March 6, Russia rejected the joint production cut

Saudi reversed the oil policy to increase the production

Price war broke out

March 9, WTI declined by 10$ to 31.13$

March 30, WTI further declined to 20.09$ under demand shock

April 2, Trump stated Russia and Saudi will cut production

Saudi called for an emergency OPEC plus meeting

April 9, OPEC plus agreed to restore joint production cut

G20 discuss the measures for market stabilization

April 12, OPEC plus decided 9.7 MB/D production cut from May

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Russian situation

OPEC plus cut benefits US shale oil (high cost producer)

Benefit to US (shale) unacceptable for Russian national interest

Russia argued Russia can bare low oil price longer than Saudi

The impact of low price much bigger than anticipation

Pandemic damaged European market, Russian main outlet

The pain was too acute for Russia

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Saudi situation

Various conditions suggest preference to higher price

Emphasis on “joint production cut” (never be a swing producer)

But joint production cut collapsed by Russian rejection

This lead to Saudi reversal to market share strategy/price war

“Lose a battle to win a war” strategy

The pain of low price, a driver for restoration of joint cut

But the pain was beyond anticipation

The importance of the call from Trump

Actually, joint cut was restored (as originally aimed at)

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US situation

US shale oil, high production cost oil

Oil price, not affecting US gov. budget deficit/surplus, but…

Below 20$ caused serious damages to shale revolution

Destructive impact on US shale industry

Low oil price caused lower NY stock price

Economic pain was too strong for Trump

Mediation for Russia/Saudi price war

US production likely to be in the hand of “market mechanism”

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OECD Company oil inventory

Oil inventory build put strong downward pressure on oil price

Source: Prepared by author based on IEA data

2507

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

Jan-0

6A

pr-

06

Jul-

06

Oct

-06

Jan-0

7A

pr-

07

Jul-

07

Oct

-07

Jan-0

8A

pr-

08

Jul-

08

Oct

-08

Jan-0

9A

pr-

09

Jul-

09

Oct

-09

Jan-1

0A

pr-

10

Jul-

10

Oct

-10

Jan-1

1A

pr-

11

Jul-

11

Oct

-11

Jan-1

2A

pr-

12

Jul-

12

Oct

-12

Jan-1

3A

pr-

13

Jul-

13

Oct

-13

Jan-1

4A

pr-

14

Jul-

14

Oct

-14

Jan-1

5A

pr-

15

Jul-

15

Oct

-15

Jan-1

6A

pr-

16

Jul-

16

Oct

-16

Jan-1

7A

pr-

17

Jul-

17

Oct

-17

Jan-1

8A

pr-

18

Jul-

18

Oct

-18

Jan-1

9A

pr-

19

Jul-

19

Oct

-19

Jan-2

0A

pr-

20

Jul-

20

Oct

-20

OECD inventory

Past 10 Y ave

（100万バレル）

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Short-term outlook for oil market

10 MB/D joint production cut is not enough

Some uncertainty over the future of joint production cut

Current oil demand may contract by more than 20 MB/D

The shared “terror” contributed to restoration of joint cut

Global inventory capacity may be filled up sometime in 2Q

Thus oil price under strong downward pressure

2 critical factors: future of demand destruction and joint cut

If pandemic stabilizes and economic recovery in 2H this year with continued joint cut, oil price may head for 30$

If pandemic continues to destabilize the world with uncertainty over joint cut, oil price may go down to be below 10$

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Reduced LNG demand accelerates supply glut

Even without pandemic, 2020 market sees supply surplus…

Note: 2020 RS assumes 3% minus for world GDP, while LPS assumes 6% minus

315 315

349 347

381369

325312

0

50

100

150

200

250

300

350

400

Supply Demand Supply Demand Supply Demand RS LPS

2018 20202019

(Million ton)


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Regional gas/LNG price in the world

Asia spot price declined significantly. JCC indexed price will follow

0

2

4

6

8

10

12

14

16

18

20

Henry Hub

NBP

Japan LNG average

Asian spot LNG

Units: USD / million Btu

Data Sources: Customs Statistics, ICE, PRAs

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Short-term outlook for LNG market

LNG market sees supply surplus even before the demand shock

Main reason was substantial increase in LNG supply

Chinese LNG demand reduced after the COVID-19 outbreak

Pandemic further reduced global LNG demand: Demand shock

Large-scale supply glut and decline in LNG spot price

Oil price collapsed and term LNG price decline with time-lag

Asian LNG price will be lowered as a whole

Price gap between term LNG price and spot price?

Competitiveness of US LNG (HH price plus fixed costs)?

There is no “OPEC plus” in LNG market

Source for supply flexibility: US LNG supply?

Over-supplied market remain longer than anticipated

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Long-term implication of COVID-19 pandemic

Transportation demand may structurally restrained

Digitalization may substitute transportation demand

Oil demand restrained, acceleration of “electrification”

Any shift in the priority of “3E”?

Implication on decarbonization and energy security?

Pandemic shed lights on the importance of “big government”

The rise of “me-first” trend and its impact on geopolitics

The meaning of priority to “self-sufficiency”

Crisis management efficiency: Democracy vs authoritarian

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Thank you very much for your kind attention.

Documents

IEEJ © 2020, All rights reserved...Ken Koyama, IEEJ, April 27 th, 2020 Gas/LNG demand reduction versus 2020 level Natural gas LNG-150 -100 -50 0 OECD Americas OECD Europe OECD Asia