Booming LNG faces big swings in supply-demand balance

Recent years have seen rapid growth in the global market for liquefied natural gas (LNG), with volumes of exports and imports up 10% in 2018 alone. This expansion is set to continue apace in the years ahead, according to a new forecast from research firm BloombergNEF (BNEF). The report shows that the global LNG market is set to see sharp shifts between excess supply and excess demand during the period 2019-2023. The effect on prices may hinge on weather patterns.

However, growth rates of LNG exports and imports are seen moving out of sync in 2019-2023, with exports increasing faster than imports in 2019, which will put downward pressure on prices unless unusual temperatures in import markets lift demand. Imports will then outstrip exports in 2022-2023.

BNEF’s ‘Global LNG Outlook 2019-2023’ sees LNG supply jumping by 33 million metric tons per year in 2019, reaching a record 358 MMtpa, with the US Gulf Coast, Australia and Russia commissioning or expanding export facilities. Meanwhile, structural LNG demand, or weather-neutral demand at current LNG prices, is expected to rise by 17 MMtpa this year, thanks to additional purchases for power generation and heating in Europe and Asia.

This year’s expected excess supply will be hard for the market to absorb, unless we get a dose of ‘wild demand’ for either a hotter summer or colder winter in North Asia or Europe. If not, there will be pressure on LNG prices.

The prospect of short-term oversupply is not deterring investors. A further seven multibillion-dollar LNG export projects, including three in Louisiana in the US and two in Mozambique, are close to a final investment decision and are likely to put extra supply into world markets post-2023.

BNEF expects the market to become tight again from 2022 onwards, with demand rising due to a higher penetration of gas in China’s inner provinces and the growth of LNG bunkering in inland waterways, and as Thailand and Pakistan become important engines of LNG demand growth.

That period could also prove to be testing for Europe’s power and heating sectors. Europe will become increasingly import-dependent for its gas over the next few years. The LNG market is forecast to tighten by 2023 and European prices will need to be high enough to compete with those of fast-growing markets in Asia and to attract LNG imports.

The jump in LNG demand last year, totalling nearly 30 MMtpa, reflected a 41% surge in the purchasing of the commodity by China, and other significant percentage increases in imports in South Korea, India, Pakistan and Europe. One of the few countries to see a large percentage reduction in demand was Egypt.

On the supply side, 2018 saw the start of production at three LNG ‘trains’, or liquefaction and export facilities, in Australia, at two more in Russia and three in the US. The world’s largest LNG producer, Qatar, increased production only marginally.

One important symbolic change for LNG is the gradual shift away from using crude oil as the price benchmark for contracts, to using a gas index, underlining the way the LNG market has matured as an alternative to coal for electricity generation and for industrial, business and residential heating. The BNEF report indicates that new projects from the US are pushing the mix toward gas indexation.