Global LNG prices fell again in October, down to 6.65 $/mmbtu in northeast Asia; with small amounts of incremental supply weighing on a market beset by weak underlying demand. While some life might be seen in prices as we head into the heating season, any respite should be short lived, as a wave of supply is soon to hit the market.
Q1 16 should be the start of the supply tipping point, with Sabine Pass, Gorgon, Angola, and PFLNG (Petronas) all commissioning, and Yemen potentially restarting. This will continue with a steady stream of trains being commissioned in the year, adding 47 Mt of supply capacity. For 2016, we forecast supply will increase by 35 Mt (16%) y/y, which is made up of 22 Mt coming from APAC, while the MENA region adds 4 Mt (Yemen), Africa 4 Mt (Angola) and North America 5 Mt (Sabine Pass 1&2).
All that supply is coming into a global gas market not that hungry for LNG—at least not at current prices. Over 2016 and 2017, the demand story in northeast Asia faces the headwind of added nuclear 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.
MENA, which has been the demand growth story of 2015, will also be good in 2016, although we think increments will slow in 2017 as the existing FSRUs start nearing full capacity. The impact of Eni’s super-field discovery (Zohr) will also be increasingly felt, as Egypt will look to receive that gas from 2019, which could keep Egypt from chartering another FSRU in the interim.
Over 2016, we expect Asian demand to grow by 4.0 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 8.2 Mt y/y, with Egypt leading the way. Outside of those two regions, demand remains weak.
This global softness for demand 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 56 Mt (increments of 23 Mt in 2016 and 34 Mt in 2017). Of that 56 Mt, only 17 Mt will be supplied from the US.
In terms of added demand for US gas imports beyond that level in 2017, there will not be that much room, with current fuel switching gains in Europe likely to be limited to around the 65-70 Mt level.
Over all of 2016, northeast Asian prices will average 5.6 $/mmbtu, with summer-16 price forecasts down to an average of 5.1 $/mmbtu. While winter-16 prices might see some recovery, regional differentials see northeast Asia increasingly trading at a discount to Europe.
We initialise our 2017 price forecasts with global prices falling again y/y, and with European prices needing to drop to get more gas into power. European summer prices will 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.