Global LNG prices underwent a slight seasonal ramp up in the first half of November, as the move into the heating season saw modest northeast Asian demand growth. Prices into northeast Asia increased from 6.9 $/mmbtu at the start of November to 7.8 $/mmbtu. The increase in demand left few additional cargoes available for Europe over November, in line with our expectations that added supplies to Europe would be limited in Q4 15.
Q1 16 remains the start of the supply tipping point, with one train at Sabine Pass, Gorgon, Angola, and PFLNG (Petronas) still on track for commissioning. We have pushed our Yemen start date back to Q2 16, as there is little sign of the plant coming back anytime soon. While Q1 16 will only still see a moderate level of incremental LNG available for Europe (1 Mt), the supply side will only accelerate with a steady stream of trains commissioned in 2016. We expect some 47 Mt of added supply capacity, and with the base effects of the trains added in Q4 15, this will allow supply to increase by 32 Mt (13%) y/y, which is made up of 21 Mt coming from Asia-Pacific, while the MENA region adds 3 Mt (Yemen), Africa 4 Mt (Angola) and North America 4.5 Mt (Sabine Pass 1&2).
We still see the global gas market as lacking sufficient hunger for LNG at current price levels. Over 2016 and 2017, the demand story in northeast Asia faces the headwind of added nuclear and renewable generation capacity in both Japan and Korea. China and India both have the potential to add demand, although a number of structural issues need to be overcome for those demand stories to be realised.
The headwinds have started to surface already. Korea has reduced its commitment to US supplies in a deal with Europe’s EdF. China’s NOCs are starting to offer Australian volumes into the market, and many of the regions buyers are looking for more flexibility in contracts to re-sell volumes back into the market. As spot LNG prices come under increasing pressure, which we think starts as we go through Q2 and Q3 16, the gap between spot LNG and contract prices should begin to widen, while lowering the prospects of taking US gas to the Pacific basin.
Over 2016, we expect Asian demand to grow by 4.1 Mt (2%) y/y, largely driven by demand growth in China, India, Pakistan and the Philippines. MENA will provide the strongest growth outside of Europe, with demand growing by 8.5 Mt y/y, led by Egypt.
The demand-supply imbalance means more LNG for Europe, and we think the 2016 to 2017 period will be full of additional cargoes making their way to Europe. Over this two year period, we see LNG volumes sent to Europe increasing by 51 Mt (increments of 17 Mt in 2016 and 34 Mt in 2017). 2016 imports will be concentrated in H2 16. Of that 51 Mt, only 16 Mt will be supplied from the US.
In terms of added demand for US gas imports beyond that level reached in 2017, there will not be much additional room in Europe, with current fuel switching gains likely to be exhausted around the 60-70 Mt level. This suggests prices will go down to the point where the Henry hub-NBP arbitrage window closes.