The outlook for natural gas and coal

Natural gas and coal prices have risen since the start of the year, albeit with significant fluctuations in the first quarter. Prices have been boosted by rebounding global economic activity, bouts of very cold weather in northeast Asia and the U.S., and several supply disruptions. Prices are expected to average around one-third higher in 2021 than in 2020, before stabilizing in 2022. Demand for both commodities is anticipated to increase in 2021 in line with the economic recovery, particularly in Asia.
 

Natural gas prices spiked on strong demand and supply outages. Natural gas prices rose sharply in 2021Q1, with an increase of 40% (q/q) in the U.S., 29% in Japan, and 25% in Europe.  The rebound was driven by the economic recovery, with a further surge triggered by bouts of very cold weather and supply disruptions. As these factors eased, natural gas prices fell back in March Japan and the U.S.

Natural Gas Prices

Japanese spot prices reached record highs. In Japan, the spot price of natural gas reached an all-time high in January, well above the contract price.  Demand for liquefied natural gas imports soared amid a sudden drop in temperatures, exacerbated by the temporary closure of several nuclear reactors which increased demand for natural gas-powered electricity.

Coal prices also saw a strong recovery, boosted by firming demand and supply disruptions. Australian coal prices rose 30% and South African prices were up 20% in 2020Q1 (q/q). The increase was partly due to the global recovery, but was also driven by cold weather in northeast Asia and several supply issues , including a major sandstorm in China and flooding in Australia.

Coal-powered electricity capacity fell in the EU and U.S., but expanded elsewhere in 2020. As the energy transition gathers pace, renewables are increasingly more competitive than coal. In the EU and U.S., more coal-powered electricity plants were retired than added in 2020  due to increasing renewable capacity as well as coal-to-natural gas switching. However, these reductions were offset by increases elsewhere.