The outlook for coal and natural gas: Accelerating transitions

Natural gas prices rose by 18%, on average, in 2020Q3 as the global economy began to recover, and prices are now above their pre-pandemic levels. In contrast, coal prices have been broadly flat and remain around 20% lower than their January level. The pandemic has accelerated existing shifts away from coal toward natural gas and renewables, and this is set to continue. Natural gas prices are forecast to see a further recovery in 2021, driven by strong demand as global economic activity strengthens, while production is anticipated to increase only gradually. In contrast, coal prices are expected to stabilize near their current levels. The main risk to the outlook, as with crude oil, is the duration of the pandemic and its impact on the global economy.

Natural gas prices declined steadily through the first half of 2020, with prices reaching record lows in 2020Q2, but they have since seen a robust recovery. The fall in prices was due to a drop in natural gas consumption as a result of the COVID-19 pandemic and associated global recession. The decline was much smaller than for oil, however, as the main uses of natural gas are in electricity generation and industry rather than transport.

Demand for natural gas has since rebounded as the global economy has started to recover. Consumption in the U.S. was also boosted by robust residential consumption for heating amid cooler weather. This increase, together with a pickup in exports of natural gas, led to a surge in U.S. prices toward the end of 2020—U.S. natural gas prices briefly rose above $3/mmbtu in early November, although they have since dropped back somewhat. On the supply side, most natural gas producers cut output in response to the fall in demand, while natural gas produced as a by-product of oil production in the United States also declined as oil production fell sharply.

LNG exports remain on upward trend despite the pandemic
The pandemic caused a sharp drop in trade of liquefied natural gas (LNG) as global demand fell. In the U.S., LNG exports were around 50% lower in 2020Q3 than in 2020Q1. However, they have since seen a robust recovery and are expected to continue to rise in 2021, in line with the broader economic recovery. Global exports of LNG had been rising rapidly before the pandemic struck and were an increasingly important feature of the natural gas market. In 2019, LNG accounted for roughly half of all natural gas exports, up from one-quarter in 2000. Exports from the United States alone increased by 66% in 2019 (y/y), followed by Russia (up 58%). The growing importance of LNG has been critical in reducing price differentials between regions, most notably reducing Asian spot prices.

Coal prices remain subdued amid ongoing transition
After falling more than 20% in 2020Q2, coal prices stabilized in 2020Q3, a sharp contrast to crude oil and natural gas prices. Demand for coal has tumbled this year, with the COVID-19 pandemic accelerating an existing trend of declining coal consumption in favor of natural gas and renewables. Low natural gas prices in 2020 have also accelerated coal-to-gas switching. All major coal producers reduced production in response to the fall in demand, led by Colombia (in part due to labor disputes), Indonesia, and the United States.

Renewable energy now accounts for a larger share of U.S. energy consumption than coal
Reflecting these developments, the share of coal in primary energy consumption in the United States dropped below renewables for the first time. Renewable energy capacity has risen significantly in recent years, boosted by increasing cost-competitiveness with fossil fuels. For example, benchmark solar prices have fallen by around 90% over the past decade, and solar is now the lowest cost source of electricity, according to the International Energy Agency.

Looking ahead, a concerted effort by governments to implement “green” COVID-19 recovery packages could further benefit renewables at the expense of coal (and to a lesser extent, natural gas, particularly where gas extraction results in significant methane emissions), although progress to date has been mixed. Many countries have also announced plans to reach “net zero” carbon emissions, including the European Union and Japan (by 2050) and China (by 2060), as have many companies. However, achieving net zero in the next 30-40 years will not be possible without a major shift in policies to accelerate the transition.