Global LNG supply glut seen sticking around for another two years

Houston — LNG exporters were told Tuesday to brace for an oversupplied market and weaker than expected global demand depressing prices for their output for another two years, followed by a period of recovery and then renewed uncertainty around the middle of the decade.

That was the consensus message as market participants gathered during the first day of the American LNG Forum in Houston.

The outlook is expected to force a reckoning among the more than one-dozen US projects that are actively under development and have yet to reach final investment decisions. How many end up going forward is key to determining exactly when the market balances. In the meantime, mild weather, Chinese tariffs on US imports of LNG and the coronavirus outbreak are clouding the picture.

"Will there be another wave of US LNG? Our view is yes," said Alex Munton, principal analyst, Americas LNG, at consulting firm Wood Mackenzie. "We're going to go into a period of a pause button pressed on the pace of development. But, certainly, another wave of investment is likely."

Benchmark prices in both Asia and Western Europe are now clearly signaling oversupply, though spreads into Southern Europe and Central Europe still remain marginally profitable. However, given the recent downward shift in the outlook for vessel costs, combined with very bearish price movement at the US Henry Hub, the forward netback remains positive through the balance of 2020, S&P Global Platts Analytics data show.

Though weak, these marginal spreads could still incentivize strong utilizations of US LNG export capacity, particularly if US LNG offtakers have hedged their cargo loadings in either the financial markets or though physical tenders.

The bigger question involves the impact of the market fundamentals and geopolitical concerns on further liquefaction development.

"We know the US is going to probably be the largest exporter of LNG in the world. We already have the plants up and running," Paul Sullivan, senior vice president, LNG, at Australian engineering and consulting firm Worley, said at the conference. "What do we do about the next phase?"

By 2026, as many as 18 liquefaction projects will be operating in North America, a number that assumes that some, though not all, of the active US projects advance to construction, Sullivan said.

"The feeling is if we can maintain a level of pricing – I'm not going to give you a benchmark other than $6/MMBtu, that's what people are settling around. If we look at that being the normal, the rapid rate of expansion of our industry can be maintained in a figure around that setup," he said.

The rub? At least in the short-term, it's hard to see those prices being achieved, especially in Asia.

SPOT PRICES

North Asian spot LNG prices plunged to a historic low Monday around $3.50/MMBtu, on a weaker demand outlook from China and softer European gas prices. Unusually warm weather in Japan, coupled with the likelihood of extended Lunar New Year holidays in China, also have weighed on an already sluggish market.

Add in the coronavirus and it amounts to a "perfect storm" of challenges for the global LNG market, Munton said.

"The market is very tough right now for sellers and developers," Munton said. "But we do see a recovery period not necessarily this year or next year, but in 2022 things will recover because the current wave of new supply will flatten out and we see demand continuing to grow. Then, as we look forward, the next stage after the recovery, which will likely be 2022-2024, is really a period of uncertainty."

The calculation for the market, Munton said, is "how to think through this uncertainty from the mid-2020s onward, which is the key window for any developers now in the pre-FID stage."