Global LNG and natural gas market in 2015

Oil price has fallen by almost 50 percent since June 2014 from around $115 a barrel to less than $60 after nearly five years of stability. The oil price is partly determined by actual supply and demand, and partly by expectation. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. OPEC led by the Saudi Arabia has decided not to sacrifice their market share to restore the price. The impact low oil price has also reverberated on the liquefied natural gas (LNG) and the natural gas market.

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a multi-year glut and a much cheaper source of gas for Europe. The global market for (LNG) will change drastically in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.

LNG price projected to fall by 30 percent 
Asian LNG prices are expected to fall by up to 30 percent in 2015 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.

Asian spot LNG prices LNG-AS have more than halved since the start of the year to below $10 per million British thermal units (mmBtu). Average import prices into Japan, the world’s top buyer, are forecast to fall to about $11 per mmBtu in 2015, down from an estimated $15.50 in 2014 and $16.45 in 2013. Japanese prices are a benchmark for LNG in Asia, a region which accounts for about 70 percent of global trade.

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 co-integrated with crude oil prices.

LNG buyers have been seeking to develop a viable spot market for LNG to de-couple from oil. The first sea-borne exports of US shale gas are expected in Asia in 2015, while a wave of Australian output is also coming on stream over the next four years, giving a boost to spot buyers by increasing supply.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.

Natural gas prices may go higher
Gas prices will also respond to falling oil prices because most gas prices especially in the Asian region are indexed to oil. Natural gas is quietly holding steady or even rising amid a high-profile crude oil price slide.
The gains mostly are seasonal — the price typically rallies or retreats along with winter heating demand — but other factors also are helping natural gas dodge the pressures that have knocked about 50 percent from the price of crude oil since June.

Some analysts believe falling crude oil prices could send gas higher. Natural gas often comes from wells drilled to produce oil. Some of this byproduct, called associated gas, is burned off at the wellhead, but some of it also reaches markets.

If oil production falls because of lower prices, the supply of associated gas on the market will shrink, giving natural gas prices a boost.

Natural gas prices typically represent a volatile mix of production rates, storage inventories and seasonal demand. It is harder to transport and store than crude oil, which means that some local markets have less flexibility to import gas from other areas or from storage. So prices for gas traded in real-time at various locations can spike quickly in a cold snap.