After a slight move upwards early in February, global LNG prices fell again, with delivered Northeast Asia prices dropping from over 7.0 $/mmbtu at the start of January to below 5 $/mmbtu at the end of February.
Against this background, the LNG supply story remains mixed. Two force majeures in February, one at Russia’s Sakhalin plant, and one in Peru, removed some volumes from the market. Putting in new volumes are the new Australian trains (AP in particular) ramping-up, while the first exports from Sabine Pass (imminent at the time of writing) were announced as heading to Brazil. The first cargoes from Gorgon and Angola are expected in March and April respectively.
While prices are tumbling, some future demand is emerging, with Pakistan stating it is planning to have four more FSRUs in place by the end of 2017, which came after it announced a 15-year oil-indexed link supply deal with Qatar for 3.75 Mtpa. Others are also showing interest.
A cautionary tale might be seen from Thailand, which put out a statement last year that held out the prospect of more than doubling of LNG imports in 2016 to over 5 Mtpa. To back this up, long-term supply agreements were agreed with Shell and BP for 2 Mtpa. With domestic gas demand growth starting to stall, the Thais have now reduced 2016 expected purchases back to 2.7 Mtpa while delaying the finalisation of those supply agreements, at least until it can find some demand.
Over 2016 and 2017, we see LNG volumes sent to Europe increasing by a maximum of 55 Mt (increments of 10 Mt in 2016 and 45 Mt in 2017). Of those 2017 volumes, 14 Mt have been supplied into the market from the US, and these will be the main volumes to which there is some downside.
Europe will struggle to absorb all of that gas, particularly in 2017, and this suggests that the arbitrage windows with Henry Hub will close. If the window shuts in Q2 17 and stays shut, then the additional US volumes arriving in Europe next year may end up well below those in our balances forecasts in our balances, potentially only around 3 Mt. We report the higher number for now, but highlight that our expectations are that volumes will be biased towards the lower levels rather than the higher levels.
Our forecast prices have been slightly revised downwards. For summer 2016, the start of higher incremental global supply volumes means we expect Northeast Asian LNG prices to drop to an average of 3.5 $/mmbtu. For Q4 16, we have Northeast Asian prices only rising to 3.7 $/mmbtu as the high level of incremental supply in the Pacific Basin keeps prices low. Given the prevailing Brent curve, we would see Brent-linked prices around the 5.30 $/mmbtu in the region, so spot LNG starts trading at a discount. Over all of 2016, Northeast Asian prices will average 3.9 $/mmbtu—down from our previous forecasts of 4.3 $/mmbtu.