LNG outlook 2016: what’s going to happen next?

Photographer: Yuya Shino

We take an exclusive look into the recently released LNG Outlook 2016 – Asian LNG Prices: Ready for the Next Journey. This Eikon-only report examines a number of factors currently affecting the global LNG market, and offers some invaluable forecasts for 2016.

Eikon users can download the full report here

While the LNG spot price in NE Asia was originally assessed for around $10/MMBtu at the beginning of the year, thanks to retreating oil prices at the end of 2014, this price level was short-lived. The drop in oil prices, coupled with mild weather in NE Asia, an abundance of storages in the region and LNG spot supply all contributed to a quick plunge in the spot price. By mid February, the LNG spot price in NE Asia reached its lowest level since 2010 at $6.7/MMBtu.

The Asian spot price tends to be priced below the long-term import price unless the market balance is particularly tight. However, last winter the market balance ended up being surprisingly relaxed.

The LNG spot price eventually increased by summer, supported by the shutdown of Yemen’s Balhaf export plant and entry of new LNG importers like Egypt, Pakistan and Jordan. At the same time, the long-term import price to NE Asia stabilized, which lent support to the spot prices, weakening only slightly during the remainder of the year. In 2015, the LNG spot price to NE Asia averaged $7.5/MMBtu. This is almost half of the average of the year before.

Déjà vu for 2016?
2016 already appears to be mirroring the patterns we saw last year, as many of these issues still persist. Winter temperatures in NE Asia are still on the milder side, with likely milder-than-normal temperatures in the coming months. We still see relatively weak economic growth in this region and oil prices again have retreated significantly. These concerns lead us to expect that LNG spot prices in Asia will fall significantly in 2016.

With an increasing volume of LNG offered in the market, LNG spot prices may have to fall to a level that assures competitiveness with alternative fuels.

NE Asian Spot and Long term LNG Prices

Supply soars while demand disappoints
Looking at a rough estimate of supply and demand this upcoming year, we expect a gradual build up of significant supply overhang. Several new Australian supply projects will ramp up production during the course of 2016. These projects are joined by the Sabine Pass LNG export project, which marks the start of an era of flexible supply.

This ‘tidal wave’ of new LNG supply is building up just as demand from large importers in NE Asia is becoming relatively weak. We do not foresee any significant upside for major mature LNG importing countries like Japan and South Korea. These countries account for around 44% of global LNG demand. The pressure from new supply is further compounded by a significant plunge in oil prices, now feeding into long-term, oil-indexed contract prices.

LNG imports to asia

For countries in South Asia and the Middle East, the low price environment for LNG is expected to spur healthy demand growth in 2016 as well. If LNG is competitively priced Indian demand potential could be significant, but additional infrastructure is required to tap into the full potential. Nevertheless, despite expectations of continued high growth rates for LNG imports to South Asia and the Middle East, the two regions still represent a relatively small share of total demand in the global market and will not be able to absorb the brisk growth in global LNG supply.

Healthy supply in the LNG market means the price for spot cargoes in Asia tends to be priced well below the long-term import price. When calculating the long-term import price to NE Asia, oil prices enter the pricing formula with a four- or five-month lag. Meaning the recent dramatic fall in oil prices haven’t even been realized yet for long-term, oil-indexed import prices. 

Towards the end of the second quarter, the long-term import price is assessed as low as $5.2/MMBtu gradually increasing to $6.0/MMBtu in December.

With downward pressure on Asian spot prices, Europe will be regarded as an increasingly attractive destination for excess cargoes. Due to significant depth in the European gas market compared to the Asian spot market we expect forward prices at NBP and TTF trading hubs to serve as a cushion or support for Asian spot prices. Based on the current NBP forward prices and our assessment of long-term import prices to NE Asia, we expect the Asian spot price to trade within in the $4.5-6.0/MMBtu range in 2016.

UK and NE Asia Price Differential
An LNG hub in Asia

The combination of increased oversupply and more flexible cargoes is expected to lead to a stronger convergence of regional prices between Asia Pacific and the Atlantic basin. The oversupply of LNG and lower LNG spot prices is also good news for importers who now have stronger negotiation positions for new and existing supply contracts and may pave the way for a long-awaited LNG hub in Asia. 

Singapore could be that hub. The Singapore Exchange introduced a weekly LNG spot index last summer supported by more and more LNG players called the FOB (free on board) Singapore SLInG which refers to cargoes in that area. China’s Shanghai is another option. Whether based in China, Singapore, or elsewhere in the area, a successful hub could facilitate arbitrage efficiently between the Atlantic basin and Asia Pacific.

The Thomson Reuters Global LNG team produces a number of relevant and timely reports every quarter, available directly on Thomson Reuters Eikon. These reports provide a synopsis of what’s going on in the LNG market alongside expert analysis and commentary from our Global LNG team.

The LNG Research & Forecast service available on Thomson Reuters Eikon gives you critical insight into the complex and dynamic global LNG market, enabling traders and analysts to fully understand what factors drive LNG spot and long-term prices and market participants to identify potential arbitrage between regions and basins based on LNG spot prices, regional hub prices and shipping costs.

Learn more about Thomson Reuters Eikon for Energy professionals

Access the Full report from the LNG app in Eikonwhich sheds light on other regions, such as the new projects ramping up production in Australia, and provides more information about the Sabine Pass LNG export project in the U.S.

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Inside Financial & Risk - Editor

The editor of the Inside Financial & Risk blog is in constant contact with the length and breadth of Thomson Reuters' thought leaders to present expert insights, deep analysis and thought-provoking ideas across the Thomson Reuters Financial & Risk organization. Read additional views and interpretations on market movement and economic news from around the globe. Email the team at fr-socialmedia@thomsonreuters.com

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