LNG Traders Have Five Issues on Their Mind After Price Collapse

  • U.S. LNG plants at risk of shut-ins if EU prices fall further
  • LNG market may balance after 2020 after period of oversupply

After spot liquefied natural gas prices plummeted by two-thirds since May 2014 amid a global glut, European traders are trying to assess how much of the fuel will arrive in the region.

These five questions dominated discussions at the LNG summit Monday in Amsterdam at Flame, Europe’s biggest annual gas conference.

When will the glut end?

Over the next five years, Australia and the U.S., the biggest new producers of LNG, will add more than 120 million metric tons of annual capacity, said Andrew Walker, vice president for strategy at Cheniere Energy Inc.’s marketing unit. That’s more than a third of current total capacity.

Cheniere in February started the first exports of U.S. shale gas in liquefied form, while Australia is on track to overtake Qatar as the biggest LNG supplier by 2018.

“The global market is going to an oversupply situation,” Luis Sanchez, head of LNG trading at Uniper Global Commodities, said at the conference. “U.S. LNG volumes are coming, new Australian LNG volumes are coming.”

The market may become balanced by early to mid-2020s, according to Ajay Shah, a vice president at Royal Dutch Shell Plc, which supplies about 15 percent of global LNG. Centrica Plc also sees gas markets heading to equilibrium in the next decade, with “price formation reverting to fundamentals,” said Nazim Osmancik, the utility’s director of fundamentals.

Will demand catch up?

After Asia, the world’s biggest LNG consuming region, had its first drop in demand last year since the 2009 crisis, traders and analysts are focusing on where future growth will come from. Latin America will see some limited demand, and Asia-Pacific is “well supplied and even oversupplied,” Uniper’s Sanchez said.

“What’s important is emerging markets, which will be drivers” of demand, Cheniere’s Walker said. “What happens in China is more important than Japan and Korea going forward.”

Outside Europe, the Middle East, the Caribbean and Latin America will “soften the wave” of supply, said Alex Bower, head of LNG trading at Engie SA.

“There is room for demand to recover,” said James Cheeseman, Atlantic basin trading manager at BP Plc’s LNG unit.

How much LNG will come to Europe?

“We haven’t seen a flood of cargoes yet, but we are getting close,” Cheniere’s Walker said.

While demand has been stable in southwest Europe and increased in the Baltic region at limited levels, northwest Europe’s liquid hubs are poised to lure more tankers, Uniper’s Sanchez said.

That region has 85 billion cubic meters (3 trillion cubic feet) a year of import capacity, or 66 billion excluding South Hook in the U.K., which receives LNG from Qatar. Assuming 75 percent is effectively used, that means 50 billion cubic meters of LNG can end up in the region, a fivefold increase from last year’s volumes, Sanchez estimated.

How much U.S. LNG will actually come to Europe depends on prices and spreads, Engie’s Bower said.

Will U.S. projects risk shut-ins?

With U.S. Henry Hub gas at $2 per million British thermal units and European gas falling to $3.50, “you could have some liquefaction capacity in the U.S. shutting in,” or halting production, said Benjamin Maruenda, senior vice president for strategy at Engie LNG.

While the outlook is bearish, shut-ins aren’t imminent, his colleague Bower said later Monday. “The spreads are sufficient for U.S. LNG to Europe,” he said.

U.S. next-month gas was trading at $2.107 a million British thermal units by 10:05 am London time Tuesday, while the comparable contract on the U.K.’s National Balancing Point hub was at $4.22 on ICE Futures Europe.

A spread of about $2 is seen on the horizon, Bower said.

Will there be price convergence?

While there will be some convergence between the Henry Hub price and the price on the NBP in the U.K., Europeans will probably always pay a premium, according to Timera.

The Trans-Atlantic arbitrage, or range at which traders can use the price differential between European and U.S. gas to make a riskless profit based on the variable cost of liquefying, moving and regasifying the fuel, will exert enough pressure to keep the NBP price at a premium, said Olly Spinks, a Timera director.

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