As a result of COVID-19, the US and global markets are suddenly facing a potential recession. The virus is impacting the economy in a myriad of ways as travel is curtailed, conferences and events are canceled, and self-imposed and mandatory quarantines impact businesses. Today’s Energy Market Commentary will highlight how the US natural gas market was impacted by the 2008 recession to extrapolate potential knock on effects to the current natural gas market.
While no two recessions are the same, the impacts of previous recessions can help highlight potential impacts. The graph above shows US Total power generation from 2007 to 2019. In 2008, power generation fell by 5% as economic activity declined. While total power generation was sliding, the fallout from crashing natural gas prices resulted in increased power generation from natural gas. The combination of lower load and gas prices falling to $4/MMbtu in 2009 led to a decade of coal-to-gas switching. The early innings of shale gas in North America were beginning to play out.
The US generation markets have changed a great deal between 2008 and present. In 2008, coal represented 47% of total generation to now being only 27% of generation. Meanwhile, natural gas has increased from 21% of total generation to now being 34% of total generation. Low cost shale gas has been the major driver of this change and can be seen in the form of power burn in 2020 YTD being up 1.9Bcf/d on average over 2019 YTD.
Natural gas demand has also changed a great deal in the last 10 years, as shown above. In 2008, natural gas demand was mostly reliant on domestic demand in the form of residential/commercial, industrial, and power. These three sectors consumed 60.4 Bcf/d in 2008 as shown above. In 2019, total natural as demand now represents 89.1 Bcf/d with 78.4 Bcf/d coming from domestic sources and 10.7 Bcf/d coming from exports. Natural gas power burn has increased from 18.5 Bcf/d in 2008 to 31.4 Bcf/d in 2019. So, what might the impact of a recession be on the natural gas market should the economy in the US experience similar declines as witnessed in 2009? In 2009, res/com and industrial demand declined by a combined 1.8 Bcf/d or declines of 1.8% and 7.5% respectively. Similar impacts to both sectors would result in declines of 2.2 Bcf/d in 2020. In 2009, power gained at the expense of coal, but in 2020 the gas market will be much more impacted by the level of total load in the system. If we adjust natural gas power burn by the 5% decline in generation witnessed in 2008, that would represent an additional 1.6 Bcf/d decline in demand. If the Mexican economy responds similarly to 2008, one would expect a 7% decline in exports to Mexico or about 0.4 Bcf/d. These sectors thus could combine for total declines of over 4.2 Bcf/d or on average 5% lower than 2019 levels.
Considering the US gas market was already expected to be long supply following a weak winter 2019-2020, an additional 4.2 Bcf/d is a lot of length to manage into an already long summer gas market. Add in an oversupplied global LNG market and the US gas market could be further awash in supply if demand falters. While US operators are slashing CAPEX in the face of falling oil prices, the risk of demand shocks to the system may overwhelm the CAPEX declines. For more on BTU Analytics’ latest thoughts on oil and gas markets in 2020 and 2021, check out our latest Upstream Outlook.