An upcoming drop in demand in Japan, lower oil prices, and imminent new supply set the stage for lower spot LNG prices. US arbs to Asia, Europe are still open but should narrow as exports ramp up, pressing global LNG prices down, according to Bank of America Merrill Lynch.

Medium-term, liquefaction capacity under construction in the US and Australia may limit a significant price recovery, the bank said in its latest forecast.

The world is craving for cleaner energy sources, including natural gas. Yet, the global picture for LNG is everything but joyful. Total world demand for gas grew by only 0.4% in 2014, the lowest rate since 2009.

In China, demand even dropped in the first half of the year, with LNG imports declining by 9% YoY. "We've kept a bearish view on LNG for some time, but now think prices may go even lower in the coming weeks on 1) lower demand from Japan as nukes restart, 2) pressure from the recent drop in oil prices, and 3) upcoming new supply."

Two new LNG liquefaction plants came online in July in the Pacific Basin, and Merrill Lynch see five more projects starting this year.

In the US, construction of the Sabine Pass export terminal is very advanced, with the first shipment expected by year end. However, only part of Sabine Pass' near-term capacity is contracted. As such, spare US liquefaction capacity could aggravate the ongoing spot LNG market glut.

“Moreover, given soft medium-term global LNG balances, we see limited appetite for long-term contracts from either European or Asian buyers.”

“Still, we estimate US to Europe and US to Asia arbs to be currently wide open at around $1.70 to $1.80/MMMBtu. These arbs could narrow as spot LNG exports ramp up, pulling up US nat gas prices and putting downward pressure on European and Asian LNG prices.”

Longer-term, the critical question for LNG global prices is whether there will be enough demand to meet incremental supply from Australia and the US. In 2014, global regas capacity ran at a low utilization rate of 33%, far below the long run average of 50%.

However, growth in global regasification capacity, a proxy for planned demand growth, is set to fall well short of liquefaction growth in the next few years.

When looking out to 2018, liquefaction capacity growth is set to force regasification utilization rates higher, possibly pushing prices lower to incentivize customers to take on the excess LNG supply.
Source: Bank of America Merill Lynch