COMMERCIAL and industrial demand for natural gas is declining as most countries around the world impose lockdowns to limit the spread of the Covid-19 pandemic.

Rystad Energy estimates global natural gas demand to fall by almost 2 per cent this year as a result of the lower activity.

In absolute terms, global gas demand is expected to total close to 3,878 billion cu m (Bcm) in 2020, down from 3,951 Bcm last year. In pre-Covid-19 estimates, this year’s natural gas demand was expected to grow to 4,038 Bcm.

Like oil demand, gas demand is also expected to suffer as a result of the slowdown. However, low prices are shielding gas demand to some extent as the fuel remains more competitive than other sources of energy, especially in the power sector where gas use remains relatively stable in most countries.

"2020 will be the first year since 2009 where there will be no growth in consumption. This will be a hard blow for an industry accustomed to yearly growth rates of more than 3 per cent," says Rystad Energy’s Head of Gas and Power Markets Carlos Torres-Diaz.

The impact on gas demand has varied substantially from country to country depending on the severity of lockdown measures and factors such as the power mix and industrial activity. Countries with capacity to switch from coal to gas will see less effect from the demand drop.

The average loss in gas demand from the power and industrial sectors in Italy, for example, has been a staggering 23 per cent over the duration of the lockdown. However, Italy has little coal-power generation capacity, meaning that any reduction in power demand will represent a similar drop in gas-for-power demand as it is difficult to achieve a reduction in generation from renewable sources.

Other European countries have seen similar effects, with the International Energy Agency estimating a total loss in weather-adjusted gas demand of 25 per cent in France and 19 per cent in the UK.

On the other hand, demand in the US continues to thrive, mostly as a result of increasing demand from the power sector which has compensated for the drop in other sectors. Gas demand from the power sector has averaged 25 billion cubic feet per day (708 million cu m per day) over the last two weeks, which is practically in line with last year’s level.

There are many other countries that also have a large coal-to-gas switching capacity, such as Australia, Germany and South Korea, which could see similar demand responses to the one seen in the US.

A lot of uncertainty remains about the actual impact on gas demand. The possibility of new lockdowns, the slowdown in economic growth and the effect of stimulus packages on reactivating commercial and industrial activity could all tip the gas-demand scale.

Therefore, if coal producers manage to reduce prices further and the steep contango in the gas forward curves remains, then there is a risk of seeing a slowdown in gas demand towards the end of the year.