Natural gas and coal prices have plunged this year, in sharp contrast to oil prices, which have staged a recovery (see previous blog). The decline has been most pronounced in European natural gas and Asian liquefied natural gas (LNG) spot prices, which are down more than 50 percent relative to their peak in September. Coal prices have fallen by 30 percent, on average, since their peak in August. The decline has been caused by weak demand and a sharp increase in LNG exports from the United States and Australia. Prices are expected to recover somewhat from current levels as demand recovers, according to our latest Commodity Markets Outlook.
Natural gas prices have declined sharply since the start of the year, with the wedge between the three main spot prices narrowing dramatically. Spot prices in Europe and Asia, which had risen in the second half of 2018, plunged in March and April. The fall was triggered by weaker demand due to mild weather and the restarting of nuclear power plants in Japan, as well as greater availability of LNG. Prices in the United States have also fallen after a brief surge in late 2018, amid ample production of natural gas from shale fields.
Global exports of LNG have been rising steadily. Exports from the United States rose 50 percent to 3 bcf/d in 2018 and are expected to double to 6.1 bcf/d by the end of 2019. Surging production of natural gas in the U.S. has facilitated an increase in LNG exports, despite a 10 percent jump in U.S. natural gas consumption in 2018. LNG export capacity in Australia and Qatar has also increased substantially and is set to grow further.
Over the next two years prices are expected to recover from their current lows as demand picks up but remain below 2018 averages. Further ahead, the increase in LNG capacity is set to alter the composition of natural gas markets, which have historically seen prices linked to oil prices. The expansion of long-distance gas trade via LNG tankers will cause price differentials between different locations to shrink. This will be good news for importers of natural gas.
Coal prices fell 7.6 percent in the first quarter of 2019 (q/q) following steep declines in the second half of 2018. In advanced economies, demand for coal declined in favor of natural gas, particularly for electricity generation. Seaborne prices have also been affected by China’s decision to curb imports of coal from Australia, its biggest supplier.
Coal demand growth muted, driven by China and India
Coal prices are expected to partially recover from their current levels and average $94/mt in 2019, a 12.1 percent decline from 2018, reflecting the weakness in natural gas prices, as well as muted demand. The ongoing shift away from coal to natural gas in electricity generation is expected to continue. The medium-term outlook depends heavily on policy decisions in China and India, particularly environmental policies aimed at reducing air pollution. Together, the two countries account for more than 60 percent of global coal consumption and have been the main engines of growth in demand.