Natural gas and coal prices have fallen sharply since the start of 2020 due to weak demand and ample supply. European natural gas prices have fallen to multi-decade lows, and are down almost 40% since the start of 2020. U.S. natural gas prices have seen smaller declines, in part reflecting their already low levels. Price differentials between regional natural gas benchmarks have continued to decline, helped by the increasing availability of liquefied natural gas (LNG). Coal prices (Australian) declined by around 15% over the same period, with weaker demand partially offset by reduced production in China.
However, the fall in natural gas and coal prices has been smaller than for crude oil prices, which have declined by around 65% since January. Natural gas and coal are primarily used for electricity generation and industrial purposes, rather than transport. As such, lockdowns and travel restrictions have had a smaller impact on demand for these commodities, than for oil.
Natural gas and coal have seen a substantial reduction in demand as shutdown measures caused a reduction in industrial activity and electricity consumption, while an exceptionally warm winter also reduced demand in early 2020. The International Energy Agency estimates that lockdown measures have reduced electricity demand by at least 15% in several major economies, including France, Italy, Spain, and the United Kingdom. In the United States, the U.S. Energy Information Administration expects electricity decline in the United States will fall around 5%, with a modest decline in residential use offsetting a larger fall in commercial and industrial use—sectors more affected by shutdowns.
Outlook
Price forecasts for both commodities have been revised down for 2020. Natural gas prices are expected to recover from their current lows, but will still fall by around 25% relative to 2019, while coal prices are anticipated to decline by 20%. Demand for natural gas is expected to gradually recover from its current low levels as shutdowns are lifted, but will remain below its 2019 levels. Demand for coal is likely to remain weaker, as part of the ongoing shift from coal to natural gas in power generation. For example, in the United States, the EIA expects natural gas demand to fall 4% in 2020, while coal demand will fall 23%. Coal demand in emerging and developing economies is expected to be remain more robust.
While both natural gas and coal prices are expected to increase in 2021 as the impact of COVID-19 wanes, natural gas prices are expected to see a stronger recovery. Natural gas production growth, particularly in the United States, is expected to be substantially weaker than previously expected. The gas rig count, a measure of new drilling activity, has fallen to its lowest level since at least 1987. Investment in new LNG projects has also fallen. The main risk to the forecast for both commodities is a slower end to the pandemic, both through a longer duration of mitigation measures and a deeper global recession.
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