By Dan Murtaugh, Bloomberg News
A slew of new export projects will add about 33 million tons of production capacity this year, while structural demand will grow by only about 17 million tons, BloombergNEF analysts including Maggie Kuang wrote in a mid-term market outlook report published Thursday. That means that without a huge increase in demand driven by extreme weather, prices will need to fall low enough to either displace coal from power plants or shut in U.S. production.
LNG producers have feared for the past few years that a massive build-out of new export projects, which began a decade ago, will outpace consumption growth and leave cargoes looking for homes. Spot prices have already tumbled since last fall and are at a steep discount to LNG sold on long-term, oil price-linked contracts.
“This year’s expected excess supply of 16 million tons 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,” said Ashish Sethia, BloombergNEF’s head of commodities. “If not, pressure will be on LNG prices.”
A glut hasn’t formed yet only because of an unexpected surge in demand from China. The country doubled LNG imports from 2016 to 2018 amid a government-led effort to cut smog by replacing coal with gas in homes and factories. That growth will slow this year as government concerns about economic growth outweigh the environmental push, Kuang said in the report.
Meanwhile, the start up of new export projects in the U.S. will contribute to excess global capacity. Europe will soak up some of that as it has enough interconnected generation capacity that can switch between coal and gas depending on price. BloombergNEF expects the region to increase LNG imports by 43 percent this year.
That’s not expected to sop up all the surplus LNG, though. Balancing the market would require a demand boost from an abnormally hot summer or cold winter, according BNEF. Barring that, a drop in spot Asian LNG prices to about $4 per million British thermal units would spur U.S. exporters to cancel shipments. Japan-Korea Marker futures, Asia’s benchmark price, closed at $5.545 per million Btu on Wednesday.
Glutted market conditions should end by 2022, Kuang said in the report, as demand growth from China and other Asian countries finally catches up to the supply boom. More than 30 projects are currently vying for customers to underpin financing needed to start construction in time to meet that demand. BloombergNEF sees seven of those, across North America, Mozambique and Russia, as front-runners.
