Around about now it would be normal for the price of spot liquefied natural gas (LNG) in Asia to start rising ahead of the northern winter, but these are far from normal circumstances.
It’s hard to imagine a more bearish set of circumstances facing LNG suppliers, and it’s about to get worse with exports ramping up from Australia’s latest plant and the start of commissioning of the first of a wave of new units in the United States.
In previous years, the spot LNG price in Asia has shown clear seasonal movements, even within the broader price trends, generally gaining ahead of the northern winter and summers, before weakening in the spring and autumn.
But this year the price has shown no seasonality, remaining within a relatively narrow band from February until now, although within an overall weakening trend.
The spot price slid to $6.60 per million British thermal units (mmBtu) in the week to Oct. 2, down from $10.10 at the start of the year, and not even a third of the record high of $20.50 from February last year.
The drop in oil prices, combined with softer-than-expected demand growth in major Asian natural gas consumers and increasing supplies have all worked against LNG prices.
But it’s likely to get worse before it gets better.
Consider the current bearish factors:
– A strong El Nino weather event, which will likely lead to a third straight winter of above average temperatures in top consumers Japan, South Korea and China.
– The restart of Japan’s first nuclear reactor, with a likely seven more to come back online within the coming years. While this is fewer than expected, it will still cut demand for LNG for power generation.
– An easing in natural gas demand growth in China amid a more broad slowing of economic growth.
– The shipping of the first cargoes from the Gladstone LNG project on Australia’s east coast, the second of three coal-seam gas-to-LNG projects to start up.
– The test phase commencing at Cheniere Energy’s Sabine Pass LNG plant in Louisiana state, the first U.S. project to come online, with the maiden cargo expected to be shipped to Asia early next year.
– The persistent weakness in oil prices, which pulls down the cost of long-term LNG contracts linked to crude, which also drives down the spot price.
Trying to do a list of bullish factors is more of an exercise in clutching at straws, and even the best isn’t very significant as yet, being rising demand for LNG in Southeast Asia, from new importers such as Singapore, and also from traditional exporters like Malaysia and Indonesia.
PRICES TO FALL MORE THAN ANTICIPATED?
In the absence of positive drivers, the question then becomes just how low can prices fall, what is the realistic level that can be reached before the pain becomes too much and projects shut down liquefaction trains?
The hard truth is that once commissioned, most LNG trains will run at close to nameplate capacity, only going down for required maintenance.
This is because the economics of producing at a loss are still better than not producing at all but still having all the associated costs, especially for new projects, given they have to meet payments to cover the capital outlays incurred during the building phase.
For LNG producers with long-term contracts, they will still be receiving an oil-linked price that is higher than the spot price, but they will also likely to be facing pressure to lower the price, or the volumes supplied, by the buyers, who are all too aware that cheaper spot LNG is becoming abundant.
It’s likely that the spot price can test below $6 per mmBtu, and maybe even lower, especially if the precedent of coal and iron ore is followed, with the supply of both these commodities remaining in surplus as producers defied expectations that they would idle output in the face of mounting losses.
It’s worth remembering that Australia’s North West Shelf LNG project signed a 25-year deal in 2002 with China to supply LNG at a fixed $3.80 per mmBtu.
At the time this was viewed as a great deal for the partners in the project, including operator Woodside Petroleum, Royal Dutch Shell, BP, Chevron and BHP Billiton, and it was evident the project would make profits even at what is now viewed as a low price.
Perhaps that $3.80 level is closer to the floor for Asian LNG prices?