Better watch out

Published at 12:20 23 Dec 2015 by . Last edited 09:30 20 Apr 2016.

After a slight ramp at the beginning of November, global LNG prices settled into a range, trading between 7.0 and 7.5 $/mmbtu through December. As we expected, additional volumes for Europe were limited, as Asian demand was buoyed by better takes from China and India. In contrast, Japan and South Korea look to have reduced imports y/y and this has helped blunt the upward pressure on Northeast Asian LNG prices, while the mild weather in the US and in Europe pushed the gas hubs downwards.

While Q1 16 remains the start of the supply tipping point, the supply side has a few moderating features for Q1 16. AP LNG is putting in its first cargo in December, but Gorgon is likely to slip to February and PFLNG (Malaysia) has now been pushed from Q1 to July, due to issues in the shipyard. Angola remains something of a mystery, but without it putting out a tender for a cargo in January, it now seems less likely start up will be next month.

Another source of supply uncertainty seems to be Nigeria, with Eni declaring a force majeure due to some sabotage on one of the feeder pipelines. We are in two minds about this as initial reaction seems to be the plant can largely work around the problem, utilising its other feeder lines. On the other hand, force majeure is usually only called when a supplier is going to miss some deliveries so this suggests there will be some reduction in loadings. We are assuming only a modest 10% reduction in exports in January y/y, but we think there could be some downside to those numbers.

The impact of all of this on volumes is to reduce the incremental levels of expected supply in 2016, with the biggest impact on the Q1 16 numbers. Over 2016, we expect demand to grow by 23 Mt (9%) y/y, a downward revision on our previous forecasts. The corollary is more incremental supply in 2017, with this being pushed up to 44 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, Pakistan and the Philippines. That growth will be tempered by reductions from South Korea and Japan. MENA will provide the strongest growth outside of Europe, with demand growing by 9.7 Mt y/y, led by Egypt, over the coming two years.

As such, the global gas market has demand but lacks sufficient hunger for LNG at current price levels. The implication is that over these two years, LNG volumes sent to Europe will increase by 55 Mt (increments of 14 Mt in 2016 and 41 Mt in 2017). Of that 55 Mt, only 17 Mt will come from the US. This implies more fuel switching in both the UK and in Europe and continues to raise issues about how pipeline suppliers will react. We still expect the initial reaction from Gazprom will be to allow a reduction in its exports to Europe. Despite this, the pressure will still be downwards on European hub price levels.

For summer 2016, we keep northeast Asian LNG price forecasts at an average of 5.4 $/mmbtu. For Q4 16, we have northeast Asian prices staying around the same level. We maintain our 2017 forecasts with global prices falling again, and with European prices needing to drop to get more gas into power. European summer prices drop down to an average of 4.2 $/mmbtu, and drag global prices down with them, pushing northeast Asian prices down to an average of 4.1 $/mmbtu.

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