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Gas market review 2017: LNG oversupply yet to make itself felt

Posted by on 02 January 2018
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Surging demand in China, as the country attempts to switch away from polluting coal, has pushed international LNG prices up to their highest levels since 2013. Further support for prices has come from cold weather and technical incidents in Europe, where Austria’s Baumgarten terminal blew up on 11th December, sharply reducing the flow from Russia and causing temporary shortages in Italy, Austria and elsewhere. The summer saw a much looser market, accentuating the seasonal price swing, but so far fresh demand appears to be absorbing anticipated global oversupply.

Chinese appetite

Higher than expected gas demand in China heading into the winter heating season, led Chinese suppliers to buy far more from international spot markets during the autumn of 2017 than ever before, with cargoes coming from as far off as Norway and the UK. China’s dominant domestic supplier, CNPC, cut deliveries to industrial users in an attempt to avoid shortages among residential users, which have been switching from coal to gas as part of the government’s drive to clean up city pollution. Some analysts are expecting a 30% rise in LNG imports compared to last winter, which will test the limits of China’s LNG import capacity.

As a result, northeast Asian spot LNG prices have jumped by more than two-thirds since May to around $10/mmBtu currently; above oil-linked LNG contract prices of $8-9/mmBtu – although recent crude price rises, if sustained, will soon push these oil-linked deals higher too. In October, Chinese imports reached 3.4 mmt, and there was a rise of over 21% in the average LNG price for cargoes delivered to China, Japan, South Korea and Taiwan – the biggest monthly gain since November 2016.

Repeat performance

To some extent, the situation mirrors what we’ve seen towards the end of last year, when high Asian demand had also been hoovering up surplus LNG cargoes, and keeping a lid on supply into Europe, where colder than normal weather and outages at French nuclear plants caused shortages in early 2017. Last year’s short-term supply crunch saw Asian spot LNG prices rise by more than 80% between September and December, with China’s December 2016 imports at 3.7 mmt – compared to the 2016 monthly average of 2 mmt/month. Northeast Asian spot reached $9.90/mmBtu in early January, and with northwest European prices for delivery in October 2016 below $5/mmBtu, this created a major incentive to re-export or divert cargoes to China, leaving Europe short during its peak demand season.

Widening seasonal spreads

Both winters saw international LNG prices higher than had been predicted by most analysts, who had forecast that a much-heralded period of oversupply – which had been expected to begin in 2016 and last to 2024 or so – would keep prices low, even during winter. However, although markets have been tight during the winters, they have been much slacker during northern hemisphere summers, when Chinese – as well as European and NE Asian - demand for gas is much lower. The addition of more seasonal buyers in addition to China, such as Turkey, is accentuating this seasonal impact, leading to widening inter-seasonal price spreads and improving margins for storage holders.

As to whether that oversupply materialises from now on, it looks as if it will be a tussle between Chinese and other developing nation demand, and how much the big producers can add – US output is set to grow sharply, while Qatar and Russia both declared big new expansion plans during 2017, which will kick in before the anticipated oversupply ends, potentially adding to the excess. Russia says it aims to meet 18-20% of global LNG demand, and Qatar announced a 30% expansion in capacity earlier this year, in order to maintain its position as the world’s biggest exporter.

US gas stays cheap and exports attractive

Continued growth in shale gas production has insulated the US from supply tightness elsewhere, and prices have stayed low. This, and the high northeast Asian winter prices will drive US enthusiasm for LNG exports, with potential returns based on Henry Hub differentials to northeast Asian prices now extremely attractive. Export projects that had been in doubt, especially on the west coast, may now get more enthusiastic backing. They include Veresen’s Jordan Cove project, which filed for regulatory approval for the third time at the end of September. With Trump in power and many issues of contention addressed, it is more likely to be granted this time round. Located in Oregon, Jordon Cove is scheduled to bring 7.8 mnt/yr onstream by 2024.

Venture Global is still awaiting regulatory approval for its proposed Calcasieu Pass facility, located on the US Gulf coast, which it expects to receive in mid-2018. This would allow the 10.8 mmt/yr plant to begin commercial operations by 2021. On the east coast, the Cove Point project remains on schedule to be the second US LNG plant to begin exporting, with a total capacity of 5.7 mnt/yr when fully operational.

As remaining new LNG capacity is rolled out over the next few years, it may be a much closer balance between supply and demand than many had anticipated – in which price is bound to play a key role. The US export plants will provide an important alternative supply source for European buyers, especially in the face of such strong competing demand from China. But with European gas production falling steadily, demand rising and buyers eager to avoid over-reliance on Russian gas, the Continent is increasingly turning to LNG as an alternative. That may be fine in the summer season, but in the winter, it is beginning to look problematic.

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