A supply overhang in natural gas will persist into the next decade, the Royal Bank of Canada has projected, adding that China will be the single biggest driver of demand on this market.
S&P Global Platts quoted the bank's report on the topic as saying "We see the market as clearly oversupplied in 2019 and more moderately oversupplied in 2020, with really only China able to re-balance the market through continued demand growth."
Thanks to its massive coal-to-natural gas switch, China became the world's second-biggest LNG importer in 2017, surpassing South Korea and second only to Japan. Demand for natural gas in China will continue to grow in the coming years.
According to a senior IEA official, China will become the world's top LNG importer within the next five years, just as the U.S. becomes the largest exporter by 2024, with annual exports of over 100 billion cubic meters in that year. That, however, would only work out with stronger LNG prices and an end to the trade war that has stumped some LNG ambitions because of the lack of long-term import commitments, notably from Chinese importers.
Yet, if the Royal Bank of Canada's analysts are right, there are no price improvements in the cards. In fact, they revised down their price forecast for the UK National Balancing Point (NBP) benchmark for the spot market from 52 pence per therm to 45 pence per therm for next year.
"Hub pricing in Europe and Asia has fallen well below our expectations, and with European gas storage filling at levels ahead of historical norms, it paints a pretty ugly picture for gas markets," RBC said, adding that the culprits behind the current oversupply were a mild winter in key markets and an increase in global LNG supply.
Going forward, the RBC analysts warned that European demand for gas will stagnate thanks to the increased adoption of renewables. However, the continent will not be able to wean itself off natural gas completely anytime soon. It will remain dependent on imports of pipeline gas and LNG, with the latter's share in the European energy mix rising. Related: The World Can't Let Nuclear Energy Die
The bank's analysts noted the absence of any bullish factors for gas prices at the moment, saying these are only likely to be seasonal depending on the weather. They also said the first signs of these factors would not make themselves visible until early winter. However, there is one other potential bullish factor for gas prices.
Beginning January next year, new emission rules will take effect for maritime transport. Seen as a major disruptive event in the energy industry, the lower emission standards adopted by the International Maritime Organization could boost demand for LNG as bunkering.
Hellenic Shipping News reported earlier this month that there were 40 orders placed for new LNG-fueled ships as of May this year. This makes economic sense in the long run as LNG is a much lower emitter than oil derivatives used to fuel ships, and there are no other viable alternatives to low-sulfur fuels at the moment.
It would, however, take a while until this new demand for LNG as a bunkering fuel takes off and makes a difference in the global fundamentals of natural gas. For the medium term, the supply overhang is more likely than not to stay, pressuring prices and putting a question mark over the viability of some future LNG export projects.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
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