Asia's liquefied natural gas (LNG) glut is set to deepen in 2016 as long-planned new production comes to the market just as demand from top buyers Japan and South Korea as well as China wanes.
While analysts say that new consumer demand may offset dwindling use from established buyers, new supplies will outweigh overall orders, resulting in a low gas price outlook for years to come.
"From having been an import basin, Asia will next year be going to have excess supplies and worse so in 2017," said David Hewitt, co-head of global oil and gas equity research at Credit Suisse.
While term buyers will take most of the volumes from Australia's 13 new LNG supply-trains, commissioning cargoes over the next two years totalling 14 million to 15 million tonnes will go into the spot market, adding pressure to prices.Hewitt said he expected Asian LNG spot to fall to "eye-watering low" levels of below $5 per million British thermal units (mmBtu) in early 2016 and to hit a low of $4 during the year.
Because of the emerging glut, Asian spot LNG prices LNG-AS have already plummeted by almost two-thirds since 2014 to around $7.30 per mmBtu.
NEW DEMAND, EVEN MORE SUPPLY
With this wave of supply, even rising demand from new customers that will outweigh the dips in demand from established importers will not be enough to balance the market.
Japan imported 6.06 million tonnes of LNG last month, down 12.8 percent from a year ago, while South Korea's monthly imports have averaged 2.7 millon tonnes this year, the lowest since 2009, customs data showed.
China's LNG demand could dip by around 300,000 tonnes this year, according to analysts, although this is expected to be a short-term dip rather than a long-lasting trend.
A dozen new buyers - including Morocco, Poland, the Phillippines and Bangladesh - are expected to start importing LNG by 2020, creating about 13 million tonnes a year of new demand. But this will not consume the 14 million to 15 million tonnes of commissioning cargoes coming onto the market.
Along with consumption from existing buyers, newcomers are expected to add 50 million tonnes per annum of demand by 2020, yet a huge 120 million tonnes a year of new LNG is scheduled to come online by then, according to industry expectations.
With such an overhang in supplies, analysts and industry members say that some planned production will have to falter in order to rebalance the market.
In another sign of a deepening glut, China's Sinopec has been given rare approval by its partners in the Australia Pacific LNG project to sell on some of the cargoes it doesn't need for itself, albeit with heavy restrictions.
The A$24.7 billion ($18.06 billion) Australia Pacific LNG project is now starting operations and will produce 9 million tonnes of LNG a year when completed.
Most LNG deals have so-called destination clauses which prohibit the sale of unwanted cargoes to third parties.
However, ConocoPhillips, which holds 37.5 percent of the project, and Australia's Origin, with a similar-sized stake, have given Sinopec permission to sell on some cargoes it doesn't need, permitting they are sold within China or outside Asia and are sold linked to oil prices, according to Conoco. Sinopec holds 25 percent of the project.
With oil-indexed LNG prices about a dollar higher than Asian spot prices and European benchmarks almost $3 per mmBtu cheaper, Sinopec will have a hard time selling the shipments. Higher freight costs from Australia to Middle East and European markets will also add to the price of Sinopec's cargoes.
Read more at Reutershttp://www.reuters.com/article/asia-lng-idUSL3N13T2R620151204#mwr3UzMhw