Why are LNG markets dropping?

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If you are subscribed to our daily energy markets report, then you may have noticed that the LNG markets are dropping and probably want to know a bit more behind the reason why. This article looks to explain why we’re seeing a decline in this market and take a look at what this all means for the UK.

To understand the market, first you need to know that Asian Liquid Natural Gas (LNG) is a key driver of UK natural gas prices.

After a start to the year that has been rife with pressure from an oversaturated global market, warm weather reducing demand and storage at near capacity, a consistent bearish trend has emerged. Weight from predictions of supply outgrowing demand and electricity markets moving to alternative generation, has all but removed the impact of crude oil driving prices.

Traditionally LNG prices have been driven by coal, as a key competitor for electricity generation, and crude oil. Despite strong gains for crude oil in the first quarter of the year, LNG has acted to the contrary exaggerating the bearish trend in coal contracts due to a plethora of reasons.

Reasons for LNG markets falling

Firstly, record-breaking warm winter left storage at an unprecedented high in Japan, South Korea and China and the resulting increased renewable generation, dramatically reduced demand in these countries. Secondly, excess supply came from rising U.S., Russian and Australian production, which is forecast to contribute a further 19 bcm in global LNG supply this year alone. Thirdly, European markets began to expand LNG imports, creating strong storage reserves and causing European natural gas contracts to drop, lowering prices further, as warmer weather also reduces LNG demand in Europe.

Analysts expect this trend to continue as demand is expected to grow only 12 bcm (6%) this year in a best-case scenario, compared with expectations for supply to extend 19 bcm (10%) over the same period. While weather is more unpredictable than any year on record and storage in key markets remain high, there’s little but pressure expected for LNG contracts heading into Q2-19.

Despite this however, there is potential for a price reversal. As we saw at the end of last year, long term outages at LNG hubs can elevate prices. With further support by the continued rise in European demand, potentially leading to contango. Given the volatility and unpredictability of weather we’ve seen and the average summer temperature in China between 22-40°C, it is possible that LNG demand may spike in the summer for cooling.

What does this mean for the UK?

During 2018 Liquid Natural Gas accounted for 17% of all natural gas imports in the UK, with demand expected to grow 1.2 bcm (8.3% increase) this year. This surge is due to expectations of falling Norwegian natural gas production and UKCS production being weaker than in 2018 due to planned maintenance.

In continent, demand is forecast to rise 5.4 bcm between Germany, France, Belgium and the Netherlands – resulting in TTF (Netherlands pricing benchmark and strong European price indicator) being impacted further by LNG also, likely reducing prices and price volatility.

Going forward, the ever-increasing energy interconnectivity between the UK and mainland Europe leaves little doubt; the direction of LNG will heavily influence European energy contracts for the years to come.

NewsJoe Hickman