(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia Oct 6 It's around about
now that liquefied natural gas (LNG) spot prices usually start
rising in Asia ahead of winter demand, and this year looks set
to hold to the pattern, although any relief for producers is
likely to be short-lived.
While the LNG market is heading for structural oversupply
next year, and for several years thereafter, there are several
short-term factors that have been supporting prices, and should
continue to do so for a little while.
Asian spot LNG prices LNG-AS have been trending higher in
recent months since hitting $4 per million British thermal units
(mmBtu) in April, the lowest since assessments started in 2010.
The price rose to $6.10 per mmBtu in the week ended Sept.
30, up 52.5 percent from the April low, but still less than a
third of the all-time peak of $20.50 hit in February 2014.
Even though LNG prices have been in a steep downtrend since
the record high more than 2-1/2 years ago, they still exhibit
seasonal behaviour, rallying ahead of the northern summer and
winter and slipping back during the spring and autumn.
However, the size of these calendar-led rallies have been
diminishing in recent years as new LNG supply overwhelms the
seasonal demand shifts.
Nine liquefaction trains are expected to start up in 2016,
adding 35 million tonnes of LNG to the market, with the
additional capacity coming largely from new plants in Australia
and the United States. Australia is poised to become the world's
largest producer of LNG, drawing ahead of Qatar, as it completes
the last of eight new projects.
Between 2016 and 2020, global LNG capacity is expected to
rise by about 50 percent to around 370 million tonnes a year,
and it is this expected run-up in supply that has been such a
drag on prices.
In 2014, spot LNG in Asia surged almost 43 percent between
late July and the peak summer demand in September, but the
winter rally was far weaker, with prices gaining only 6.3
percent between November and January of 2015.
The next year, in 2015, prices rallied 10.9 percent between
late June and late July, and by 18.1 percent between early
October and late November.
This year, the rise in prices ahead of winter has been 15
percent since the recent low in early September to last week's
assessment, and there appears to be room for further gains.
One of the main supporting factors has been a tightening of
the U.S. natural gas market.
U.S. GAS PRICE GAIN SUPPORTS LNG
Up until 2014, LNG prices in Asia had very little
correlation with U.S. natural gas futures, but with the
advent of U.S. LNG exports, global gas prices started to
converge in anticipation of a more integrated market.
(See graphic: tmsnrt.rs/2dtuAD1)
Given that U.S. LNG shipments have now commenced, the
country is in some ways acting as the marginal supplier, meaning
that traditional producers supplying the major demand centres in
Asia have had to match their prices to the cost of cargoes from
the United States.
But U.S. natural gas prices are starting to surge as demand
gains the upper hand over supply and in anticipation of a colder
than usual winter in North America.
Futures ended at $3.021 per mmBtu on Wednesday, up 84
percent since a 21-year closing low of $1.639 on March 3.
While shipping data compiled by Thomson Reuters Supply Chain
and Commodity Forecasts shows only one cargo of LNG being
shipped from the U.S. Gulf to North Asia this year, the mere
possibility of the U.S. flows to Asia kept spot prices tied to
U.S. natural gas prices.
With the strong rally in U.S. natural gas prices, it's
likely that LNG from the new producers in the Gulf of Mexico
won't be competitive in Asia, thus allowing the region's spot
prices to rise.
LNG has also likely been boosted by higher prices for crude,
which will have dragged up the price of the super-chilled fuel
supplied under long-term contracts linked to oil.
A rally of almost 70 percent this year in Australian
benchmark thermal coal is making LNG more attractive as well
relative to its main competitor in the power generation sector.
While coal remains cheaper, its advantage has eroded, and
utilities may be tempted to use more cleaner-burning LNG over
the northern winter, especially in countries like China where
pollution is increasingly a political factor.
On the supply front, the market has been tightened by
maintenance at the Gladstone LNG plant in Australia's Queensland
state and at the Sabine Pass facility in the United States.
But both these plants should be back in production by
end-October, and Angola is also now offering cargoes after its
plant returned to operation recently, suggesting that tightness
in the market should ease by November.
This means it will take a colder-than-usual winter to extend
the rally in Asia's spot LNG prices beyond the next few weeks.
(Editing by Tom Hogue)