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The OPEC agreement reached last week to cut oil output by 1.2 million b/d (removing around 1% of global oil supply from the market) has also impacted liquefied natural gas (LNG) prices.
Spot prices for Asian LNG rose by 50 cents from the previous week to around $8.1 per million British thermal units (MMBtu), their highest price point since July 2015.
Spot LNG prices in Asia breached the $20/MMBtu mark in February 2014, then started trending downward over the next two plus years amid a growing supply glut of the super-cooled fuel. Earlier this year, prices dropped as low as $4.241/MMBtu for May delivery, a 42.5% drop year-over-year, and the lowest monthly average since July 2009, according to commodity price reporting agency Platts. However, prices started moving upward since then, mostly hovering in the $6 to $7/MMBtu range.
Traders, according to a Reuters report on Friday, said two fundamental factors put upward pressure on LNG prices in Asia over the past week. First, the deal between OPEC and non-OPEC producer Russia to cut crude output. Also, colder weather in Northern Asia and Europe helped support prices. The Asia-Pacific region accounts for roughly two-thirds of global LNG demand.
Cold weather in the U.S. is also pushing up Asian spot LNG rates, as export prices from the Sabine Pass export project are linked to U.S. spot gas prices, which have risen by a third since November to over $3.6/MMBtu, the report added.
Oil prices increased nearly 20% in the days after the OPEC deal was reached, but have pulled back some gains since then. LNG prices are usually linked to Brent crude, the global oil benchmark. In Asia, most natural gas in imported as LNG, and is often used to generate electricity.
However, expect any lasting impact from the OPEC deal on LNG prices to be marginal.
The fundamental problem for LNG markets isn’t just its historical linkage to oil prices, but the ongoing LNG supply glut that will continue to at least until 2020, and possibly longer. There's simply not enough demand to soak up current supply, not to mention even more supply that will soon enter the market from new and soon to come on-stream projects in Australia, the U.S. and Russia.
Global LNG output last year reached 250 million tons per annum (mtpa) and is projected to reach 330 mtpa by 2018. By 2018, when all of Australia’s ten LNG projects are on-stream, the country will have total liquefaction capacity of 85 mtpa, bypassing Qatar’s 77 mtpa.
LNG supply will increase by 50% from 2015 to 2020, but demand in Asia will remain weak, Marc Howson, senior managing editor at S&P Global Platts, told CNBC in October.
He said that even as supply increases, LNG demand will be weak coming out of Japan and South Korea, the world’s top two LNG importers respectively. Both countries combined make up nearly 50% of global LNG demand. One reason for the decreased demand in Japan and South Korea, he said, comes from subdued economic growth due to aging demographics in both countries.
Furthermore, OPEC still has to implement its pledge to cut oil production, but the cartel has a checkered history of complying with quotas. Even if OPEC members do comply, the output cut agreement of 1.2 million b/d would still take one-and-half-years to draw down record high oil inventory levels, according to most estimates.
