Moody’s: Oversupply to keep LNG prices low beyond 2020

Moody’s expects global LNG prices to remain low beyond 2020 as a wave of fresh supply comes online while demand from the world’s largest importers is weakening. Global oversupply will peak at about 55 million tonnes/year in 2019, according to the rating agency’s report, “Global Liquefied Natural Gas Industry: Market Imbalance Will Continue Beyond 2020, Keeping a Lid On Prices.”

Moody’s expects global LNG prices to remain low beyond 2020 as a wave of fresh supply comes online while demand from the world’s largest importers is weakening. Global oversupply will peak at about 55 million tonnes/year in 2019, according to the rating agency’s report, “Global Liquefied Natural Gas Industry: Market Imbalance Will Continue Beyond 2020, Keeping a Lid On Prices.”

“Strong LNG demand growth from China, India, and new markets will not be enough to absorb the fresh supply capacity coming online, particularly with demand falling in the largest importing countries, Japan and Korea. The market will not rebalance until the early years of the next decade, when global demand and LNG import infrastructure catches up with supply,” said Tomas O’Loughlin, a vice-president, senior credit officer at Moody’s.

Imports into Japan, the world’s largest consumer, using more than one third of global LNG, will fall to 80 million tpy by 2020, a 9% reduction from its 2014 record, as nuclear power production slowly restarts. Demand from South Korea, the world’s second-largest consumer, will be flat over this period, according to Moody’s.

At the same time, new global supply will jump 44% by 2020 (to 455 million tpy) vs. 2015 as LNG construction projects in Australia, the US, and Russia, costing more than $750 billion combined, come online. These projects were driven by a spike in demand from Japan following the 2011 tsunami and subsequent nuclear shutdowns, as well as abundant US shale gas supplies.

Capacity additions in 2016 totaled 34 million tpy and construction continues at five US and five Australian projects. Moody’s describes Sabine Pass, Corpus Christi (both Cheniere Energy), Cameron LNG (Sempra LNG & Midstream, Mitsui & Co., Mitsubishi Corp., Engie, and NYK Line), Freeport LNG (Michael Smith), and Cove Point LNG (Dominion) as advancing well but with minor cost overruns for some. Australian projects, however, “have been blighted by large cost and schedule overruns, compounded by falls in oil prices,” Moody’s said.

“Until the market rebalances, investment returns for developers of Australian projects will be weak and US LNG offtakers will struggle to recover all of their liquefaction costs,” added O’Loughlin.

The report says that as long as global supply capacity exceeds demand, US LNG offtakers will base their offtake volume and selling price decisions on the marginal cost of production. Marginal-cost priced US LNG will keep a lid on global LNG prices beyond 2020.

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