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Energy investors cheered by oil’s recent rebound should take heed of natural gas.
The commodity has been in free fall. In east Asia, gas prices assessed by Platts have declined 35 per cent since the start of 2016 to $4.40 per million British thermal units — the lowest level on record at this time of winter. In the UK, the gas price is close to $4, down by a fifth.
And in the US, the gas benchmark has plunged below $2 and is easily this year’s worst performer in the Bloomberg Commodity Index.
What is striking is that gas has fizzled across time zones. Regional markets for the fuel were once separate, reflecting the difficulty of shipping gas across oceans. As recently as two years ago, Platts’ Japan Korea Marker price was $20, UK gas was $10 and the US was about $5.
“The interconnectedness between markets is clearly growing,” says James Henderson of the Oxford Institute for Energy Studies.
It is growing because of the construction of liquefied natural gas (LNG) plants, which chill and condense gas so it can be shipped on tankers overseas. This week, Chevron began making LNG at the $54bn Gorgon project off Western Australia. Last month, Cheniere Energy exported the first shipment of liquefied shale gas from the US, where four more plants are under construction.
Global gas liquefaction capacity will reach 274.3m tonnes this year, up 30m tonnes from two years ago, according to PIRA Energy Group. It is scheduled to increase by another 65m tonnes between 2016 and 2018.
Companies decided to add this capacity when gas prices were far higher. But they are now launching ships into unexpectedly weak demand.
A string of mild winters have depressed use of gas as a heating fuel from Tokyo to New York. Across the northern hemisphere, onshore temperatures from November 2015 to January 2016 were 1.7°C above average — the biggest anomaly on record for the three-month period, according to the US National Oceanic and Atmospheric Administration. The US Energy Department forecasts domestic stocks will end winter 40 per cent higher than average — a surplus Cheniere’s plant alone cannot drain.
Demand is soft for other reasons, too. The restart of nuclear plants after Japan’s 2011 Fukushima disaster has undercut its need for gas-fired power. China’s LNG imports contracted for the first time ever last year, according to Bank of America Merrill Lynch.
Japan has contracted far more LNG than it needs until the end of the decade, says Tony Regan of Platts. He says utilities have had to turn themselves into traders in order to resell some long-term supplies. Last year, Japan’s Chubu Electric Power and Tokyo Electric Power established a joint venture called Jera, now the world’s biggest LNG buyer.
“My view is at least till the middle 2020s, a large amount of LNG will wander around the world seeking its final consumer,” Yuji Kakimi, Jera’s president, told the IHS CERAWeek conference in Houston last month. “This will happen in an already weakened market situation . . . Arbitrage among Europe, North America and Asia will also be more commonplace.”
In Asia and parts of Europe, customers’ long-term gas contracts are mainly pegged to the price of crude oil. After oil collapsed in 2014, gas prices in these markets also fell. If oil’s rebound to $40 a barrel should stick, it would take several months for this to feed into contracted LNG prices and European gas prices, says Ira Joseph, PIRA’s head of gas and power.
Buyers such as Egypt and Argentina have also stepped in to make purchases. Hadi Hallouche, head of LNG at Trafigura, the commodities trading house, says: “Traders are going to play a growing role as the spot market becomes more established.”
The direction of the gas market has flummoxed many forecasters. Just a decade ago the US was preparing to import vast amounts of LNG. Technologies such as floating storage and regasification units (FSRUs) — faster and cheaper to construct than land-based gas LNG import terminals — stand to open new markets quickly.
“The market oversupply could be absorbed soon,” Stéphane Caudron, global head of LNG at trading house Gunvor, told the Houston conference. “There are markets that we don’t even think about that could be up and running two years from now.”