Asian LNG prices seen falling by up to 30% in 2015

SINGAPORE: Asian liquefied natural gas (LNG) prices are expected to fall by up to 30% in 2015, according to a survey of analysts and consultants, as the market enters a period of oversupply and the impact of lower oil prices kicks in.

The explosive growth in LNG consumption seen in recent years has stalled on cooling Asian economies and with a resumption of nuclear energy and a greater use of coal in some markets.

At the same time new LNG production has been coming on stream, meaning tight supply conditions that had been expected to last until the end of the decade are ending more quickly.

“Demand is a lot weaker than we anticipated just six months ago,” said Gavin Thompson, head of Asia-Pacific gas and power at consultancy Wood Mackenzie.

Asian spot LNG prices (LNG-AS) have more than halved since the start of the year to below US$10 per million British thermal units (mmBtu).

Average import prices into Japan, the world’s top buyer, are forecast to fall to about US$11 per mmBtu next year, down from an estimated US$15.50 this year and US$16.45 in 2013, if Brent crude averages around US$75 a barrel, according to David Hewitt, co-head of global oil and gas equity research at Credit Suisse.

If Brent trades at US$85 next year, the price could be US$12.60 per mmBtu, Hewitt said.

Japanese prices are a benchmark for LNG in Asia, a region which accounts for about 70% of global trade.

Gas prices will also respond to falling oil prices, which have fallen 40% since June, because most gas prices in the region are indexed to oil.

Others also changed their outlook. Consultancy Energy Aspects cut its forecast for 2015 spot prices by US$1.70 to US$12.40 per mmBtu.

Asian demand shot up following the 2011 Fukushima disaster as nuclear reactors were idled in Japan, while LNG costs under long-term contracts was pushed up by oil prices.

But markets are changing. In South Korea, where some reactors were shut due to a scandal over fake certificates, most have restarted, displacing LNG, while coal-fired power plants are also running at high capacity.

In Japan, a depressed economy is also limiting demand, albeit at a high level, while weak demand is now also hitting China as slower economic growth forces buyers to re-sell imports on the global market.

LNG prices are also unlikely to top cheap low sulphur heavy oil products that Japanese utilities can use instead of gas.

If Brent trades at US$70 a barrel, the price of low sulphur oil will cap LNG spot prices at US$10.50 per mmBtu, Wood Mackenzie's Thompson said.

With Asia's energy demand at its highest during the northern hemisphere’s winter months, and long-term contracts linked to oil having a time lag of several months before being priced in, the recent oil price drop will only kick in around the second quarter of 2015.

“The link with oil prices is very strong... This means that despite increases in the share of spot volumes, average LNG prices are still cointegrated with crude oil prices,” said Mark Agerton in a research paper for the Center for Energy Studies at Rice University in the US state of Texas, adding that it estimated 73% of all LNG trades took place under long-term contracts in 2013.

“The first quarter of 2015 could be the last hurrah for LNG prices for a while. If North-East Asia is mild again, then the ramp up of prices could be really very subdued and will lead us into a couple of years of oversupply,” said Energy Aspects’ Trevor Sikorski with regards of the potential impact of winter on gas prices.

Credit Suisse said around five million tonnes of supply will come to market next year from Australia, 14 million tonnes less than initially expected, due to delays. – Reuters