LNG Glut Worse Than Oil

LNG Glut Worse Than OilLNG Glut Worse Than Oil

The glut in oil is expected to continue for the next year or so before balancing in late 2016, but the pain for liquefied natural gas could be just beginning.

There is a major difference between oil and LNG: the market for LNG is much smaller and less liquid. In other words, a handful of new LNG export terminals can significantly alter the supply/demand balance, Oilprice reported.

That is exactly what is currently unfolding.

Several years ago, spot prices in Asia for LNG spiked, particularly following Fukushima nuclear meltdown.

Japan’s demand for LNG skyrocketed. At the same time, the shale gas revolution was unfolding in the US and rock-bottom prices opened up a window of opportunity to ship American gas to Asia.

There were so many projects planned at the same time and the first batch started to go on stream this year, with many more nearing completion in 2016 and 2017.

The rush of new supply is hitting the market all at the same time.

Not only would such a rush in supply have pushed down prices on their own, the timing is actually really unfortunate for LNG exporters.

Economies in East Asia are slowing, leaving a shortfall in demand. Japan, the largest LNG importer, is seeing its economy stagnate. China’s growth has slowed significantly.

Next year may be worse than this year and 2017 could be yet even worse.

“From having been an import basin, Asia will next year be going to have excess supplies and worse so in 2017,” David Hewitt of Credit Suisse said.

New export terminals will add 14 to 15 million tons of annual LNG capacity to the spot market over the next year. But that extra supply is running into a wall of stagnating demand.

The excess supplies are beginning to change the LNG trade. The spot market is growing dramatically, as extra cargoes are resold to willing buyers.

This is undermining long-term contracts and also starting to change the practice of linking prices to crude oil prices.

But the glut, set to worsen next year and the year after that, is terrible for gas producers or LNG exporters.