LNG
Bullish notes for Liquefied Natural Gas
December 2017
Despite light trading, the November LNG spot price continued its strong run as Chinese, Korean and Indian buyers secured supplies ahead of winter demand. China and Korea are in particular expecting colder weather, while the governments of all three nations are pushing for more natural gas usage in a drive to lower air pollution levels.

Arbitrage opportunities between Europe and Eastern destinations continued, and were ranging from US$1.0 to US$2.0/Mbtu. The European Port netback occurred in the range of US$7.5 to US$8.0/Mbtu FOB. But reloads between Europe and Asia were limited to between one and three per week, including Belgium and France into South Korea, China and Japan and the UK into India, likely using Qatari produced LNG.

 The Asian spot price for winter deliveries hovered in a relatively high band from US$9.3/Mbtu to US$9.8/Mbtu on DES (delivered ex-ship) terms, representing a moderate increase over the last month.  South Asian spot (DES) were in a tight band from US9.2 to 9.4/Mbtu.  The long term oil linked contractual price for Asian destinations ranged from US$8.0 to US$8.3/MBtu. The Brent linkage is based on 3-0-1 and a 14.5% slope.  This includes deliveries to both India and Pakistan, along with Korea, Japan and Taiwan.  South-western Europe’s gas prices over the month ranged from US$7.1 to US$8/Mbtu, and were around US$0.3 to US$0.5/Mbtu higher than North-western Europe, which also showing signs of bullishness ahead of winter.

 Henry Hub was also bullish, with winter CME contracts reaching to just over US$3.3/Mbtu for January deliveries.

US Sabine Pass FOB netbacks into Europe were estimated at around US$6.1/Mbtu while for Asia, these peaked above US$8.3/MBtu.  Contracted prices paid by Asian importers also reflected higher Brent-linked pricing, roughly aligned with spot gas prices which also rose as Brent went above US$62.0/bbl.

With global liquefaction capacity largely already committed, spot volumes were also coming from portfolios sellers in addition to sales from remaining spare capacity. Currently, the spot market is around 25-30% of total traded volumes, representing around 70Mtpa or higher, however; over the previous month buyers in China and Korea appeared to be returning to contracted arrangements.  Uncertainty over winter temperatures is still translating into buyer caution, and there were light trading volumes over the month.

Qatar remains the leader, shipping at around 79 cargoes over the month to date, while Australia managed to ship 72 cargoes, ahead of the 51 loadings for the combined Brunei, Indonesia and Malaysia export terminals. As a sign of the changing supply map, Australia loaded 18 vessels in the last week, two more than Qatar. Nigeria loaded 26 vessels during the November period.  By the end of month, weekly global loadings were down to around 80 cargoes, in contrast to the early November volumes that peaked at 104 weekly shipments. This peak-period included six reloads, three each from both Europe and Korea, all destined for Japan, China and India.

In the next three months, over the winter, this supply tightening will be exacerbated by the extended shutdown of Gorgon Train-3 to almost the end of the quarter, as repairs are made to the 5.2Mtpa’s train’s heat exchangers.

Overall, LNG’s flexibility and relative immediacy also means that regas terminals continue to proliferate. These represent a relatively low-cost, precautionary infrastructure that can ensure rapid gas inflows for main consumption centres in times of emergency, even those with pipeline access to large gas fields. As such AME expects that the number of import terminals will continue to grow, and that the average global utilisation rate for most will continue to be less than 40%. The projection for demand growth is exemplified in a spate of proposed, regasification terminals, especially in southern Asia, and these are expected to operate at higher than average utilisation rates due to domestic demand growth in Pakistan, Bangladesh, and India and further to the East, China, The Philippines and Thailand.

There is a volatile supply-demand balance that is largely seasonal, but the glut is expected to deepen during 2018-19 as capacity surges towards 380Mtpa. While there is more production coming on, the international attractiveness and flexibility of liquefied natural gas may continue to stimulate higher growth rates on the demand side at the same time as a definitive supply-side ceiling exists.. Concern remains over the long lead time between a final investment decision and first LNG cargo delivery – typically more than five years, in that there continues to be steady pace of LNG trade growth as seen during the last two years.

Committed liquefaction capacity contracts, globally close to 340Mtpa, is estimated to exceed current production by around 24Mtpa; however a part of the delivered volume is going into reseller portfolios of major IOCs and traders, creating much of the volumes into the spot market.  This not only includes traders and majors, such as ExxonMobil, Shell, Chevron, Qatar Petroleum, Total,  BP, ConocoPhillips, Petronas, Vitol, Glencore, Petronet and Trafigura, but also end-users such as Osaka gas who resells around 1Mtpa per year of LNG. In a growing sign of the trend, Osaka Gas is planning to resell around 3Mtpa by 2020, now possible after a Japanese court ruled against destination clauses. 

The negative balance of contracted vs actual supply is offset by contract flexibility in ramp-up and other clauses.  Should a tightening of the remaining, uncommitted liquefaction capacity occur in the next 12 months, this could radically change the supply-demand condition in the short term market. Overall, the hangover from delayed FIDs on most new projects has created a definitive ceiling for global liquefaction capacity between now and 2021, potentially exposing spot buyers to less favourable buying conditions.

Global natural gas consumption is forecast to grow in the coming five years on the back of abundant supply, low prices and its crucial role in reducing air pollution emissions.  Over the next five years its forecast gas demand will grow at 1.6% per year, equating to an annual gas consumption of almost 4 Trillion cubic metres (Tcm) by 2022, up from approximately 3.6Tcm in 2016.  

Some 90% of the anticipated gas demand growth comes from developing economies such as China, India and Indonesia.  China alone accounts for 40% of global demand growth and this is forecast to increase by 8.7% per year to 2022, which has been assisted by the country’s policy drive to improve air quality.