IEA: Global LNG oversupply to impact trade patterns, keep prices low

New LNG supplies are coming online just as demand growth in some major markets are weakening, leading to major shifts in global natural gas trade patterns over the next 5 years, the International Energy Agency said in its 2016 Medium-Term Gas Market Report. IEA’s report assesses global gas trends and provides a detailed analysis of global gas demand supply and trade development through to 2021.

“We see massive quantities of LNG exports coming online while, despite lower gas prices, demand continues to soften in traditional markets. These contradictory trends will both impact trade and keep spot gas prices under pressure.” said Fatih Birol, EIA executive director. The combined factors of cheaper coal and continued strong renewables growth were blocking gas from expanding more rapidly in the power sector, Birol added.

The slowdown in Asian gas demand has intensified, prompting a rare decline in the region’s LNG imports. As imports from Japan and South Korea—the world’s top two LNG buyers—are set to decline, the rebalancing of global markets will depend on the rate of expansion in China, India, and other countries in developing Asia.

The annual IEA report forecasts global demand rising by 1.5%/year by the end of the forecast period compared with 2%/year projected in last year’s outlook. Slower primary energy demand growth and the decline in the energy intensity of the world’s economy are lessening demand growth for all fossil fuels, including gas. However, as demand growth for coal and oil also weakens, the share of gas in the energy mix is still expected to increase—albeit modestly—by 2021.

While gas demand is projected to remain weak, global LNG exports will increase substantially. Between 2015 and 2021, liquefaction capacity will increase by 45%, mostly from the US and Australia. New projects in both countries have commenced ramping up production. Several others are at an advanced stage of development. By 2021, Australia will rival Qatar as the world’s largest LNG exporter and the US will not be far behind.

Spot gas prices across the globe will remain under pressure due to oversupply in the market over the forecast horizon of this report. “Unwanted” LNG supplies will look for a home in Europe, due to the flexibility of its gas system and well-developed spot markets. As a result, intense competition will develop among producers to retain or gain access to European customers. “We are at the start of a new chapter in European gas markets” Birol said.

Weaker-than-expected demand in Asia is leaving several large LNG buyers in the region over-contracted. This should help accelerate a transition towards more flexible contractual structures. Moreover, with oil markets expected to rebalance before gas markets do, renewed pressure to move towards hub pricing and reduce oil exposure in long-term contracts will likely reemerge before the end of the decade.

Birol warned that today’s oversupply could foreshadow a number of supply-side challenges and security risks down the road, noting that a growing level of LNG export capacity had gone offline during the past 5 years due to technical and security issues and that such problems could get worse with low oil and gas prices.

As producers slash investments to refocus on cost reductions and budget savings, he said that such efforts may be too late for global gas markets to rebalance during this decade, but could sow the seeds for tighter markets into the next decade.

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