According to Wood Mackenzie’s latest LNG short-term trade and price outlook (Q2), fears about an oversupplied LNG market are beginning to ease as indications point towards a more modest rebalancing.
Massimo Di Odoardo, VP Global Gas and LNG, at Wood Mackenzie said: “Record demand from China absorbed a large part of the additional 33 million t of LNG supply in 2017, but can it continue to support the market?”
“We think yes through to winter 2018/2019, and while there will be a market shift in summer 2019, prices will remain relatively sustained.”
He added: “LNG supply growth in 2018 slows a little, adding 27 million t before accelerating again in 2019 to add 41 million t in 2019. For a while commentators have been debating as to whether there was enough market space globally, and in Europe in particular, to absorb all this LNG. And whether Russia was better off competing for market share in Europe, resulting in price collapsing and US LNG shutting in.”
“However, as market conditions in Europe tighten and with the oil and coal forward curve remaining high, our analysis suggests Russia will maximise its revenues by accommodating all LNG imports in 2019.”
According to Wood Mackenzie’s analysis, global LNG markets will remain tight through to 2018, and despite supply being set to increase through the winter, high seasonal LNG demand in Asia will result in yet another tight winter.
LNG prices in north Asia will trade again at oil parity, equivalent to US$12 per million British thermal units (Btu). However, as global LNG supply ramps up and new projects are added, we foresee about 40 million tpy, on an annualised basis of additional LNG supply available in summer 2019 compared to summer 2018.
The rebalancing of the global LNG market will result in more LNG having to be absorbed in Europe, with local spot prices falling to US$6/million Btu – about US$1/million Btu lower than the current forward curve. On top of this, the Asian LNG market will be sufficiently supplied with Pacific LNG supply, resulting in Asian LNG prices trading at parity to European spot price.
Nevertheless, Wood Mackenzie sees little risk for US LNG to shut down in summer 2019. Europe import dependency continues to increase as indigenous production reduces. And, as more LNG will increase competition in Europe, lower gas prices will spur some additional demand through coal-to-gas switching in the power sector.
Consequently, despite the fact Europe will import an extra 35 billion m3 of LNG, a 50% increase on 2018, Russian exports will remain sustained and in the range of 170 billion m3, albeit a reduction compared to the record level of last year (approximately 190 billion m3). European prices will soften, with TTF averaging US$6.6/million Btu through to 2019, US$1/million Btu lower than 2018 and the current forward curve for 2019. Nevertheless, this will still be high enough to facilitate full US LNG utilisation.