European gas markets feel the pressure – but there are signs of recovery

As the number of new cases of coronavirus starts to slow across Europe, many countries are reviewing their current restrictions. In many cases, lockdowns have been extended, but there are also moves to ease restrictions in some markets. As a result, while milder weather and an oversupplied market are still putting gas demand under significant pressure, signs of demand recovery are slowly emerging.

Gas demand is down across Europe’s largest markets

The full impact of coronavirus on gas demand will depend on the length and depth of lockdowns and restrictions. If current coronavirus restrictions persist for three months, we now estimate that 17.6 bcm of demand will be lost across seven of Europe's largest gas markets: Germany, UK, Italy, France, Spain, Netherlands and Belgium.

This compares to a pre-coronavirus full year gas demand forecast of 371 bcm in 2020 for these markets, which together account for 70% of European gas demand.

Italy had the biggest drop – but is starting to recover

Italy was the first European country to impose strict coronavirus containment measures. A country-wide lockdown was implemented on 10 March, followed by closure of non-essential services from 12 March with non-essential industry closing from 23 March. Italy is forecast to experience Europe’s largest loss of gas demand as a result of the outbreak – reaching 4.4 bcm under three months of lockdown.

However, while the nationwide lockdown has been extended to 3 May, some small retailers have re-opened and some manufacturing has returned. Our analysis already shows a clear rebound in gas and electric demand over the last week – though still well below pre-coronavirus levels. Of course, the lasting effects of a weaker Italian economy will still have to be factored in even beyond the lifting of lockdown.

The impact varies across Europe

Demand is down across Europe, to varying degrees.

In Germany, Europe’s largest gas market, industrial demand initially proved relatively resilient. However, this has lost momentum since country-wide social distancing restrictions and lockdowns in some states were introduced. Overall, demand is set to drop by 3.5 bcm if the current restrictions last for three months.

In the UK, the second-largest gas market, electricity demand has reduced by 14% since the start of the lockdown. As coal is uncompetitive in this market, lower electricity demand poses a disproportionate risk to gas. We currently expect 2.6 bcm of lost gas demand if the lockdown lasts for three months.

For now, the impact on supply is muted

Gas production in Europe has not yet been significantly impacted by the spread of coronavirus. European gas producers have delivered only minimal adjustments so far. Supply changes have been driven by other factors, including legacy decline and mild weather. Operators are focused on limiting the impact of the virus on production by delaying non-critical maintenance and adapting workforce patterns so that they can continue producing.

However, with European hub prices remaining low, some operators will face challenges in covering even their short-run marginal costs. For now, some of Europe’s legacy pipeline suppliers are falling below 2019 levels.

Storage is playing a key role in helping to balance against falling demand

By the end of March, Europe had a record 57 bcm gas in storage, further weakening an already oversupplied summer market. Attention is turning to Ukraine’s gas storage facilities as a potential solution. Additionally, we are likely to see increased pressure on LNG suppliers to the European market – most notably from the US.

This article is a snapshot from a weekly update from our Europe Gas Research team, which includes a pan-European view as well as detailed country reports for Germany, UK, Italy, France, Spain, the Netherlands and Belgium. To read this week’s update, visit the store.

Already a Wood Mackenzie customer? Access the report here.