LNG oversupply likely to burden spot prices

(Tomohiro Ohsumi/Bloomberg)
(Tomohiro Ohsumi/Bloomberg)

HOUSTON — A looming glut of liquefied natural gas is set to force down local spot prices for the fuel, according to energy consulting group Wood Mackenzie.

About 130 million tons per year of new LNG supply is set to come online over the next five years. At the same time, the global economy has slowed, and China — a major source of demand for the fuel — has seen its economy falter.

The large addition of supply and weakening demand could spark a downturn in LNG prices similar to the 2008-10 downturn, when Qatar added 50 million tons per year of new capacity while markets sputtered.

“The LNG market is facing another oversupply which is likely to be deeper and will persist for some years,” said Noel Tomnay, head of global gas and LNG research at Wood Mackenzie, in a study released Tuesday. “Prices in Asia will be lower than in Europe, and at their lowest, between 2017-19, while prices in Europe will not reach a low point until 2020.”

China’s economy will be a wildcard throughout this period, according to Wood Mackenzie. If the country’s regulators allow more liquefied gas in, the demand could lessen the glut.

In addition, the price of coal will be a factor in determining how much LNG is needed across Asia and Europe. Higher coal prices would encourage power generators to switch to run on natural gas, while lower prices would allow them to run on coal.

Wood Mackenzie also noted that major natural gas suppliers, such as Russia’s national energy companies, could push LNG prices higher if they choose to curb access to their natural gas.

“It was Gazprom’s withdrawal of 20 billion cubic meters per year of pipe gas from Europe between 2008-10, equivalent to 15 million tons per year of LNG, that prevented spot prices from remaining low,” Tomnay said in a statement. “At periods of severe oversupply, Russian gas supply behavior will again be key to gas price formation in Europe — and this time in Asia and even the US too.”