LNG market: over-supplied up to 2020 but under-supplied beyond

LNG market: over-supplied up to 2020 but under-supplied beyond

Liquefied natural gas (LNG) is playing an increasingly important role in the global energy market. It is

cheap, abundant and relatively clean environmentally. But, like other commodities, it is subject to

cyclical forces. High oil prices in the past, to which LNG contracts are linked, have encouraged the start-

up of various projects around the world. Supply from these projects is expected to come into the market

over the next few years. As a result, the market is expected to be over-supplied up to 2020. Beyond that,

the market is likely to be under-supplied as the current low oil price environment makes starting new

projects unviable meaning that demand will eventually catch up.

The global market for LNG has experienced strong growth. Since 1990, demand for LNG has grown at

the rate of 6.2% per year, more than four times as fast as demand for oil. LNG stands out as a cheap and

clean source of energy, particularly for power generation. Most LNG is sold under long-term contracts

which are linked to oil prices, but it is also increasingly sold on spot markets. The share of LNG sold on

the spot or under short-term contracts (less than four years) rose from 25% in 2012 to 29% in 2014.

Within the LNG market, Qatar is a dominant player. It is the largest exporter of LNG in the world,

accounting for 31.4% of total exports in 2015.

LNG supply capacity is expected to grow strongly by around 8% a year through 2020. The environment

of high demand growth and high oil prices prior to 2014 led to a large number of LNG projects being

considered globally in a number of countries. But the sharp reversal in oil prices since mid-2014 led to a

re-evaluation of these projects. Only a fraction of the considered projects is now expected to come on

stream. In particular, those projects already under construction will probably be completed. But those in

the earlier design or engineering stage could very well be scrapped. Still, as a result of the projects

already under construction, a large amount of LNG supply is expected to hit the market, especially from

Australia, the US and Russia.

While the supply outlook is largely pre-determined by the progress on existing projects and is relatively

insensitive to price movements, the picture for demand is less certain. But even under the bullish

scenario of demand growth of 6% a year through 2020, it will still fall short of supply capacity. Such

strong demand growth could materialise under two conditions. First, natural gas replacing coal as

feedstock for power generation in order to meet global environmental targets. This effect is expected to

be particularly visible in China and Europe. Second, higher incomes, particularly in fast-growing

emerging markets such as India, leading to increased demand for power and, consequently, for LNG.

Putting together the demand and supply outlooks yields three implications. One, because demand

growth is expected to fall short of supply, the LNG market is expected to be over-supplied in the next

five years. Two, the over-supplied market is likely to exert downward pressure on spot prices. This could

provide incentives for LNG buyers to purchase on the spot market rather than through long-term

contracts. This in turn could lead to renegotiations of long-term contracts, which would impact

suppliers, especially the new comers. Three, the drying up of the project pipeline (no new plants

approved so far in 2016), the long lead time of LNG projects (five years or more) and the strong

expected growth in demand as more environmental-friendly measures are implemented should lead to

supply shortages beyond 2020. In other words, the strong cyclicality in the LNG market should continue

over the next decade.

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