By Pratap John
Chief Business Reporter
Liquefied natural gas prices may recover this winter as heating demand gains in many countries including Japan boost demand for LNG spot purchases, Bank of America Merrill Lynch (BOAML) has said in a report.
“Japanese nukes will mostly be offline this heating season and LNG burn may exceed last year’s when the weather was mild. As heating demand rises, so will spot purchases in Asia,” Bank of America Merrill Lynch said in its weekly global energy report.
“The risk to spot LNG prices near term is also skewed to the upside if oil prices find support on an Opec cut and a slowdown in US shale oil output, as we expect,” BOAML said.
In a move entirely out of sync with the seasonal norm where demand and prices strengthen into winter, Asian LNG spot prices sold off in October to $13/MMBtu (million British thermal unit), opening an astonishing $5 gap to where prices traded last year. Clearly, the collapse in oil prices is reverberating across the energy complex, and is now filtering through to LNG prices.
“Yet, we still expect LNG prices to recover this winter,” BOAML said.
Nonetheless, any seasonal price recovery may be muted with the PNG project producing at full capacity, demand looking weak in Asia Pacific, especially China, and major LNG consumers well stocked.
PNG LNG is an integrated development that is commercialising the gas resources of Papua New Guinea. Gas will be exported as LNG to customers around the world. The project will produce 6.9mn tonnes of LNG a year.
“We doubt LNG prices can trade above $18 /MMBtu this winter as the balance is significantly weaker than last year, barring an unusually cold winter. After that, the combination of Japanese and Korean nuke restarts, which coincide with the start-up of new LNG supplies in Australia, will result in considerably weaker balances from Q2, 2015 onwards, earlier than we previously expected.
“In our view, this may lead to another big seasonal summer price plunge next summer. The lumpiness of new LNG supply next year implies a more volatile environment,” BOAML said.
Looking further ahead, BOAML sees large ramp-ups of Australian projects currently under construction until 2017. After that, the Australian supply growth tails off to make room for lower cost US projects.
“We still see 68mn tonnes per year (9.1 billion cubic feet a day) of US LNG exports by 2020, starting with the Sabine Pass terminal starting up in late 2015. Strong US supply growth will likely put downward pressure on LNG prices over the next few years, though long term we still see price support for Asian LNG at the Australian total cost breakeven of $13-14/MMBtu,” BOAML said.
