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Wood Mackenzie: summer relief for LNG

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LNG Industry,

In its new quarterly analysis of global LNG fundamentals, Wood Mackenzie expects that the softening in Asian LNG spot prices will find temporary relief in the summer with demand growth in the Pacific outpacing that of global LNG supply. However, as new Australian LNG supply ramps up towards the end of the year, prices will come under further downward pressure, converging back to European spot prices.

Massimo Di-Odoardo, Principal European Gas Analyst for Wood Mackenzie, explains the current market picture: "For the first time since 2009, Asian LNG spot prices are trading at a discount to European spot prices, like the NBP. Benign weather conditions in North East Asia and ample supply availability, combined with low oil prices continues to put pressure on Asian LNG prices. In contrast, high seasonal demand and the cap imposed on Groningen production for the first half of 2015 are resulting in European spot prices trading relatively high and close to oil indexed contract prices, despite abundant LNG imports.”

However, Mr Di-Odoardo warns that a typical summer price decline is not assured. Instead, Asian LNG and European spot price levels will be sustained through this summer. Furthermore, rising winter prices are also not assured, and prices in 4Q15 will instead fall, despite the beginning of the winter season.


In Europe, Wood Mackenzie says the market will test the soft floor provided from the coal to gas switching potential in the UK. Mr Di-Odoardo elaborates: "With coal prices trading around US$60/t and EU ETS carbon prices in excess of US$8/t, the US$27.7/t carbon price uplift that will be introduced in the UK in April will result in coal to gas switching potential at gas prices around US$7/million Btu.” However, Russian oil indexed prices will be lower than that from the summer and it is likely that they will pull prices down in 4Q15. Mr Di-Odoardo, explains: "As oil-linked Russian contract gas incorporate a six to nine month oil price lag in its formula, players have been maximising off-take of gas from storage through 4Q14/1Q15 in expectation of cheaper-to-come Russian gas. The subsequent high storage injection requirement will result in a growing call on Russian gas through the summer, at a time of reduced LNG imports, a consequence of higher LNG requirements in Asia, resulting in the US$7/million Btu price floor to 'hold'. However in 4Q, the combination of low prices and upward flexibility on Russian contract gas is expected to push prices below US$7, despite sustained coal to gas switching in the UK."


Ms. Yingying Zhou, Asia LNG Research Analyst for Wood Mackenzie, summarises the outlook for Asian demand: "The restart of some nuclear capacity in Japan and the commissioning of new nuclear and coal capacity in South Korea will result in lower demand in 2015. However under normal weather conditions we expect more LNG demand in China, while the ramp up of new contracts and more regasification capacity will facilitate new demand in South East Asia, India and the Middle East. Overall, we expect Asia Pacific LNG demand to be some 6 million t higher in 2015 compared to last year, despite 1Q being lower."

The prognosis for Asia in the summer is that spot prices should rise. Through 2Q15 and 3Q15, Wood Mackenzie forecasts year-on-year demand growth to outpace that of LNG supply, helped by reduced LNG supply from West Africa, North Africa and South East Asia. However, spot prices will be capped by fuel oil equivalent levels, peaking around US$8.5/million Btu.

However, Ms Zhou adds: "While ordinarily we'd see a pick up in prices with seasonal demand in Winter, this year we forecast that the ramp-up of LNG from Australia will outpace Pacific LNG demand growth in 4Q and, in the absence of particularly cold weather, spot prices are expected to soften again, and converge with European prices below US$7/million Btu."

Edited from press release by

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