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IEA releases 2016 ‘Medium-Term Gas Market Report’

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LNG Industry,

The International Energy Agency (IEA) has released its 2016 ‘Medium-Term Gas Market Report’, which forecasts significant shifts in the global gas trade over the next five years. The report claims that this shift will be a result of new LNG production and weakening demand in major markets. For instance, lower demand in Japan and South Korea will mean that new LNG will need to find other markets. The report goes on to say that China, India and ASEAN countries will become major buyers of the fuel.

The Executive Director of IEA, Fatih Birol, said: “We see massive quantities of LNG exports coming online while, despite lower gas prices, demand continues to soften in traditional markets.” Birol went on to say that the growth of gas in the power sector was being suppressed by cheap coal and growth in renewables.

Nonetheless, the annual report predicts that global demand will rise by 1.5%/yr by the end of the forecast period. However, in last year’s outlook, a 2%/yr increase was expected by the end of the forecast period. Thus, whilst gas demand is expected to increase, it is also expected to do so modestly.

The report also claims that, whilst gas demand is expected to remain weak, global LNG exports will rise significantly. Liquefaction capacity will increase by 45% between 2015 and 2021, mostly due to projects in Australia and the US. By 2021, the report states, Australia will rival Qatar for the position of world’s largest LNG exporter, with the US not far behind.

The report also states that oversupply over the forecast period will keep spot gas prices across the world under pressure. Unwanted LNG cargoes will likely be sold in Europe, because of the flexibility of its gas system and well-developed spot markets. As a result of this, producers will compete fiercely to gain or hold onto European customers. Birol remarked: “We are at the start of a new chapter in European gas markets.”

The oversupply of LNG will also have ramifications outside of Europe. For instance, as demand is proving to be weaker than expected in Asia, a number of large LNG buyers in the region are over-contracted. This will help speed-up the transition towards more flexible contractual structures. In addition to this, with oil markets predicted to rebalance ahead of gas markets, renewed pressure to transition towards hub pricing and reduce oil exposure in long-term contracts is likely to re-emerge before 2021.

Birol also argued that the current oversupply had the potential to foreshadow various challenges on the supply-side, as well as a number of security risks. He noted that the amount of LNG export capacity going offline is growing, because of both technical and security related issues. Birol added that these problems could become more severe with low oil and gas prices. As producers cut down on their investments in order to focus on reducing costs, he claimed that such efforts could be too late for global gas markets to rebalance during this decade. Instead, he claimed, they could sow the seeds for tighter markets into the following decade.

Edited from various sources by David Rowlands

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