Global LNG prices fell back over September. The move out of peak summer and the first signs of the coming supply wave pushed prices into northeast Asia back to 7.0 $/mmbtu.
The supply side has seen more activity in the short-term tenders market, increasing from three cargoes offered in August to 26 cargoes offered in September. A number of these cargoes have been from the new Australian terminals.
The fall in prices occurred while Yemen’s Balhaf LNG terminal remains offline, with that country still unstable and a start date likely to be at least three months away. Some other exporters continue to struggle, with y/y losses still being recorded from Algeria, Indonesia, Oman and Trinidad, while Egypt and Angola both remain shut-in.
A strong El Nino tilts the probability towards northeast Asia experiencing a milder than average winter, meaning the three big importers in the region could see a third mild winter in a row. This is unlikely to support demand, particularly with nuclear capacity developments in both Japan and Korea likely to push some LNG out of power.
Meanwhile, China is going into this winter with more gas customers—one of the major distribution companies has announced that over H1 15 it connected almost 800 thousand new residential customers (a 22% increase on H1 14) and 4,600 commercial and industrial customers to its gas distribution network. We expect China’s LNG imports to rise modestly y/y this winter, particularly in Q1 16.
India remains a market with potential, but that is unlikely to be realised this winter as the Kochi pipeline is now only expected to be completed halfway through 2016. The only demand bright light in LatAm, Chile, could still see some demand upside this winter, but headwinds suggest y/y demand increments are likely to be short-lived (see Global LNG Insight: Chile, 25 September 2015).
In Q4 15, global exports will rise by 0.74 Mt y/y, as APAC supplies 3 Mt more gas, but MENA exports fall by 2.2 Mt due to the ongoing Yemen outage. As most MENA demand is new, y/y increments will be high at 1.9 Mt, requiring European demand to fall y/y by around 0.9 Mt in the quarter.
Q1 16 starts to feel the force of the new terminals, with export volumes expected to be up by 7 Mt y/y due to Angola, Sabine Pass 1 and Gorgon all starting, Gladstone and AP LNG ramping up from Q4 15 commissioning, QC LNG hitting full production, and Yemen possibly restarting. While demand is up in MENA (2.9 Mt), and Asia (1.7 Mt, due to increases in China and India), LatAm is down by 1 Mt, leaving 3.2 Mt more y/y available for Europe.
Even if Europe gets cold this winter, prices are still unlikely to go much above the 44 p/therm (6.7 $/mmbtu) level prevailing in Russian oil-indexed contracts. If northeast Asia has another mild winter, LNG prices would need to go below that level to push spot gas back to Europe, a phenomenon we expect to emerge in Q1 16.
For next summer, more softness will see prices fall towards the 5 $/mmbtu level. As Qatari volumes will need to be redirected from Asia and back to Europe, Asian prices will continue to be at a discount.