LNG faces underlying troubles beyond Covid-19 – analyst
While the Covid-19 pandemic has played a role in driving down LNG prices, the market also faces existing and emerging “underlying troubles”, including weaker Asian demand, renewables competition and oversupply, according to consultancy Eurasia Group.
The group said on Monday the natural gas market was “cratering”, with spot prices for LNG in Asia falling below USD 2/MMbtu (EUR 6.27/MWh) for the first time.
The Asian benchmark JKM front-month price last closed at USD 2/MMbtu, marginally up from late-April levels.
As with other markets, the drop in spot LNG prices was in part triggered by the global Covid-19 recession, as most LNG supplies, especially in Asia, are still supplied under long-term contracts, the consultancy said.
“The spot market largely serves to meet short-term needs on the demand side or to replace supply disruptions.”
“Amid a global recession, short-term demand spikes are few and far between, and orders for spot LNG cargoes are drying up,” it said. The consultancy pointed in particular to reports of an Australian cargo recently selling at below USD 1.73/MMbtu.
During the pandemic and the accompanying recession, LNG imports by the world’s top three consumers — Japan, China, and South Korea — are down from pre-crisis and peak winter monthly demand levels of about 20m tonnes (27.2 bcm) in December and January, according to Eurasia estimates.
“That said, at a joint 18.1 million tonnes in March, they are still 2% higher than this time last year.”
It noted that with China gradually reopening its economy, Europe also taking first steps to revive its industry, and Japan and South Korea seemingly better prepared and less affected by Covid-19, the LNG sector should come out of the coronavirus pandemic less scathed than the oil industry.
Yet Covid-19 was not the only factor driving down LNG prices, Eurasia Group said.
“Other factors have been at work, evidenced by the fact that prices were chasing record lows even before the global outbreak,” it said, citing in particular the record rise in LNG supply over the past five years.
“Even before the pandemic, an LNG supply overhang was expected to last until the mid-2020s,” it said.
The consultancy also pointed to “a future of tepid demand growth”, in part linked to demographic changes in established markets, where stagnant or declining populations are eroding long-term demand.LNG also faced increased competition from renewables, political pressure to clean up the energy industry and the effects of climate change, it added.