As the heating season in the northern hemisphere moves towards an end, global LNG prices fell again, with delivered Northeast Asia prices dropping from just below 5 $/mmbtu at the end of February to hovering just above 4 $/mmbtu at the end of March.
Supply was less dominant in the news. The first couple of commissioning cargoes from the first train at Sabine Pass have made their way to South America, while the first commissioning cargo from Gorgon is loading. The force majeures in Peru and at Russia’s Sakhalin LNG supply have ended, while the civil war in Yemen grinds on despite renewed diplomatic efforts—meaning it remains likely that no LNG will be seen from that country this year.
There are growing signs that it is a very hard environment to get the green light for any large LNG supply projects. Woodside has indefinitely postponed its offshore Australian Browse project, the project partners for Indonesia’s Abadi project pushed a FID back to 2020, the Jordan Cove project in the US failed to get construction approval, largely on the grounds it has no buyers, and ENI sought to divest some of its pre-FID Mozambique project.
There are some emerging signs, however, that the prevailing low prices are starting to stimulate demand. Over the first two months of the year, healthy demand growth was recorded in both China and India. The China story was largely about colder weather combined with an expanding domestic market for gas-fired space heating. As such, the size of the y/y increments could well drop away once we are out of Q1 16.
For India, it is much more about new subsidies to get gas into power combined with lower priced spot gas that should help mean gas can be sold into the country’s power markets. Gas is now getting cheap enough to burn, with international prices now at a level that is broadly in line with the domestic prices paid for gas from deep offshore fields.
Although not expected to be a growth market, the continuing nuclear saga in Japan took another turn with the two Takahama units that were just returning to service being halted again. It is now hard to say exactly when these units will go to restart, but while Japan is unlikely to see positive y/y increments, its declines are likely to be smaller than previously forecast.
The market also saw some heightened buying interest from a country we expected to be less supportive—Argentina. The fundamentals for the country do not look overly encouraging of its LNG takes, with more domestic gas supply available, better hydro levels and a depreciating currency all making it difficult. However, if any country can benefit from lower prevailing spot prices, it is Argentina—given it has no long-term supply contracts.
Given we are moving out of the northern hemisphere winter into the much more mild Q2 period when gas demand moderates, it is hard to see any upside for global gas prices going through the coming two quarters. A very hot Q3 is the main bullish factor, particularly if the Takahama plants remain offline, which could provide a modicum of support. But given the supply situation, sub-5 $/mmbtu prices for LNG spot should now be seen as the new normal with sub-4 $/mmbtu likely to be just around the corner.
Our forecast prices have been left largely unchanged. For summer 2016, we expect Northeast Asian LNG prices to drop to an average of 3.5 $/mmbtu.