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Natural Gas Set To Fall Even Further

Natural gas prices are likely…

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Global LNG Markets Are Circling The Drain

Asian and European LNG prices…

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Gas Prices Languish As Storage Falls To Near-Record Lows

Natural gas inventories are remarkably…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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It’s “Feast-to-Famine” For The Global Gas Industry

The oil majors have been piling into bets on natural gas in recent years, viewing gas as a more durable source of demand growth than oil for the long haul.

Some of those bets could pay off, but there are also plenty of risks. Presently, there is a glut of natural gas in the U.S., dragging down prices and spreading financial distress throughout the shale industry.

The glut is a global phenomenon. Coal is getting killed in Europe because natural gas prices have crashed there as well. As Bloomberg reported, coal stockpiles are surging as utilities switch to gas, taking advantage of rock-bottom prices. Germany, the UK and Spain collectively burned 70 percent less coal in August compared to the same month in 2018.

A surplus of gas means that LNG prices in various markets are languishing at their lowest levels in a decade. Spot prices in Asia fell below $5/MMBtu, down by two-thirds from price levels seen just a few years ago.

And the substantial shift away from coal and into gas in Europe is not enough to soak up the surplus. “Earlier this year, we were concerned that Europe would be called on to balance the global gas market as the onslaught of US led LNG supply would be too much for Asian consumers to digest,” Bank of America Merrill Lynch wrote in a note entitled “The Big LNG Short.”

“Sure enough, European LNG imports increased significantly this year, which caused European nat gas prices to collapse to $4.1/MMbtu on average this summer,” the investment bank wrote. Utilities are burning more gas, but “[e]ven so, European gas stocks are at record high levels currently.”

“If the global gas market exhausts European storage capacity in the coming weeks, relatively low LNG shipping rates could facilitate floating storage to help balance the market until cold weather shows up,” Bank of America warned.

Meanwhile, China’s appetite for LNG is cooling. Demand for LNG in China may only rise 14 percent this year. That is still a significant number, but below historical growth rates and ultimately a disappointment to LNG shippers everywhere, many of which are banking on insatiable Chinese demand. The trade war is also cutting into consumption, and Bank of America slashed its forecast for Chinese LNG demand for 2019-2021. “We believe the slower rate of demand growth, rising domestic production, and new pipelines will limit China LNG import growth.” Related: Banks See Oil Prices Staying Low Despite Attacks On Saudi Oil

The supply/demand balance looks pretty frightening if you are in the LNG business, at least for the next few years. “[W]e forecast Asian LNG demand growth of 15mmtpa and global growth of just 8mmtpa YoY in 2020, and the weakening macro outlook presents downside risk to our forecast,” Bank of America said. “Against this backdrop, the US continues to lead an estimated global LNG supply growth ramp up of 40 mtpa in the next two years.”

“For better or worse, global gas markets are more connected than ever before. A mild winter across the northern hemisphere or a worsening macro backdrop could be catastrophic for gas in all regions,” Bank of America concluded.

To be sure, the market could flip from bust to boom in the mid-2020s, which follows the steep decline in upstream investment in the last few years. “We are going to have an issue in the coming three or four years, paying the price for the lack of [final investment decisions] in the past two or three years,” Laurent Vivier, president of the gas division at Total SA, said at an industry conference in Tokyo, according to the Wall Street Journal.

Independent analysts echoed that sentiment. “The supply outlook is very much a feast-to-famine situation,” said Nicholas Browne, Asia gas and LNG director at Wood Mackenzie, according to the WSJ.

That could result in a rebound in prices sometime in the early- to mid-2020s, a development that would very much be welcomed by companies making major bets on gas. Still, while the market may turn more favorable to gas producers and exporters in several years’ time, the industry then faces the prospect of losing competitiveness to renewable energy. By 2035, many gas-fired power plants risk becoming stranded assets.

“Even as clean energy costs continue to fall, utilities and other investors have announced plans for over $70 billion in new gas-fired power plant construction through 2025,” the Rocky Mountain Institute (RMI) said in a recent report. RMI estimated that 90 percent of the proposed gas capacity is already more expensive than equivalent renewable energy. By 2035, the plants may be uneconomical to keep online. “Continued investments in these power plants will present stranded cost risk for customers, shareholders, and society,” the report concluded.

By Nick Cunningham of Oilprice.com

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  • Bill Simpson on October 01 2019 said:
    Africans will be using a lot more gas, starting in about a decade, so will Asians outside of China. In 20 years, the world will need every cubic meter of gas that can be produced. Pipelines to areas with large gas reserves will be a great investment.
  • Randall Hunt on October 01 2019 said:
    Nick, much of your analysis seems good and factual, but I believe you betray your bias towards renewables by blindly accepting slanted information on the economics. I suggest you go back and do a more thorough analysis of the economic competitiveness of natural gas to renewables, divorced from Bloomberg-like propaganda. I'm talking about economics that factor in renewable subsidies, need for backup power to support them, and the need to dispose of them, among other factors.

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