Jun 2016 Financial News

Natgas prices lower for longer

Jun 30, 2016

There is potentially more bad news for the T&T economy with predictions from the International Energy Agency that LNG prices will be significantly challenged in the next few years because of anemic demand growth and huge sources of new supply coming on stream and from Goldman Sachs that the present oil recovery is unlikely to continue into next year due to supply and demand issues.

In its Medium Term Gas Market Report, the IEA said the next five years will bring a reshaping of the global gas trade. It noted that new LNG supplies are coming online just as demand growth in some major markets weakens, resulting in major shifts in global gas trade patterns.

“A weak outlook for Japan and Korea—the world’s top two LNG buyers—means that new supplies will need to find other markets. China, India and ASEAN countries will emerge as key buyers” the report read.

T&T’s economy is heavily dependent on oil and, in particular, natural gas prices where it earns revenue from export of LNG from Atlantic’s plant in Point Fortin.

The annual IEA report, which gives a detailed analysis and five-year projections of natural gas demand, supply and trade developments, sees global demand rising by 1.5 per cent per year by the end of the forecast period, compared with two per cent projected in last year’s outlook.

Slower primary energy demand growth and the decline in the energy intensity of the world economy are lessening demand growth for all fossil fuels, including gas. As demand growth for coal and oil also weakens, the share of gas in the energy mix is still expected to increase— albeit modestly—by 2021.

The report said: “While gas demand is projected to remain weak, global LNG exports will increase substantially. Between 2015 and 2021, liquefaction capacity will increase by 45 per cent, mostly from the United States and Australia. New projects in both countries have commenced ramping up production. Several others are at an advanced stage of development. By 2021, Australia will rival Qatar as the world’s largest LNG exporter and the US will not be far behind.”

IEA executive director Fatih Birol said: “We see massive quantities of LNG exports coming on line while, despite lower gas prices, demand continues to soften in traditional markets.” He said: “These contradictory trends will both impact trade and keep spot gas prices under pressure.”

Birol added that the combined factors of cheaper coal and continued strong renewables growth were blocking gas from expanding more rapidly in the power sector.

The report noted that fundamental developments point to oversupply in the market over the forecast horizon of this report which should keep spot gas prices across the globe under pressure: unwanted LNG supplies will look for a home in Europe, due to the flexibility of its gas system and well-developed spot markets. As a result, intense competition will develop among producers to retain or gain access to European customers.

Birol warned that today’s oversupply could foreshadow a number of supply-side challenges and security risks down the road, noting that a growing level of LNG export capacity had gone offline during the past five years due to technical and security issues and that such problems could get worse with low oil and gas prices. As producers slash investments to refocus on cost reductions and budget savings, he said that such efforts may be too late for global gas markets to rebalance during this decade, but could sow the seeds for tighter markets into the next decade.

Meanwhile, Goldman Scahs has argued that crude prices are unlikely to go much beyond US$50 a barrel as demand growth will remain tepid and production rebounds after outages in several parts of the globe come to an end.

Source:
Business Guardian, BG8
Thursday June 30, 2016