After a slight ramp up in Q4 15, global LNG prices have started to tumble, with delivered Northeast Asia prices dropping from over 7.0 $/mmbtu at the start of January to just over 5 $/mmbtu at the end of the month. The price drops were driven by a mild winter and sharp reductions in crude oil prices (down by 18% since December)—affecting both LNG contract prices linked to Brent, and the price of competing fuels, be it LPG or coal.
Given this, the 2016 supply story is just ticking over. Q1 16 start ups at Sabine Pass, Gorgon, and Angola now seem much more likely to be producing at the end of the quarter (March), and further minor delays seem unlikely to these three trains. Meanwhile, the first AP LNG train has started putting in cargos on a more regular basis and should be fully ramped up by the end of the quarter.
While LNG production still has to actually start from many of this year’s new terminals, the market is already starting to show the tensions that come with greater supply capacity. Qatari gas that has been contracted under spot or short-term contracts, making it the most likely to be pushed out of Northeast Asia, so Qatar has been busy offering discounts to secure off-take contracts. Its deals with Petronet and Pakistan Oil point to the increasingly competitive nature of global LNG trade.
With start-ups pushed back from January to March for Sabine Pass, Angola, and Gorgon, and a six-month delay to our assumption for the date Yemen returns, the expected increments of LNG supply into the market for 2016 are moderately down on previous forecasts. Over 2016, we expect demand to grow by 20 Mt (9%) y/y, a downward revision on our previous forecasts of 23 Mt. The corollary is more incremental supply in 2017, with this being pushed up to 47 Mt.
Over 2016 and 2017, we expect Asian demand to grow by 7.1 Mt (2%) y/y, largely driven by demand growth in China, India, and Pakistan. That growth will be tempered by reductions from South Korea and Japan. MENA will provide the strongest growth outside of Europe, although recent payment issues in Egypt could provide some downside to those numbers.
Coal prices have also fallen, with the lowest being seen in Europe. At the same time, a sharp drop in European carbon pricing means that coal-to-gas fuel switching in the region’s power markets has become more elusive. This has implications for both the volume of coal-to-gas switching that might be realised in Europe and the utilisation of the US gas export facilities in the first few years of their operation. In next month’s Insight, we are going to look at the interaction of the coal and gas markets in the coming years.
All of our forecast prices have been revised downwards in light of the milder winter so far and the changes to Brent-linked LNG contract prices. Our new forecasts see 2016 average prices for Northeast Asia dropping to 4.3 $/mmbtu (from previous heights of 5.8 $/mmbtu) while 2017 prices are down to 3.7 $/mmbtu (from 4.4 $/mmbtu). In 2017, we see Northeast Asia at a discount to Northwest Europe, while the summer could even see the arbitrage window between the US and European hubs start to close, particularly if Henry Hub prices have drifted upwards.