Global natural gas and LNG prices have been under pressure during the last decade as increased supply has arrived on the market from the U.S. and Australia. This dynamic has aligned with a global slowdown in world trade and fears over global growth. The situation was also hampered by fears over a U.S./China trade war, although this seems to be reaching a conclusion as both countries have bigger issues to contend with and appear to be finding common ground.
The U.S. benchmark Henry Hub spot price was trading at just above $2.00 per Million Btu at the start of 2020, which is the lowest level since September 2009. This is in line with the growth outlook as China’s annual GDP growth rate has halved from 12% in 2010 to 6.0% in September 2019.
Despite the slowdown in growth, China’s demand is still expected to remain healthy due to increased industrialization and coal-to-gas switching but the risks of a hard landing for the country persist until a return to growth is seen.
Australia LNG Supply Growth Dominates
Australia has now surpassed Qatar as the world’s biggest exporter of LNG after shipping an estimated 77.5 million tons in 2019. The gulf country exported 75 million, whilst the U.S. could only export 35 million, although the U.S has ramped up gas supply in the latter half of the decade due to the shale boom.
The Australian position was boosted by the Prelude field, operated by Royal Dutch Shell, which shipped its first LNG cargo in June last year. Prelude was the last of eight new fields that have come online since 2015. Alongside the new field, supply is expected to ramp up in other projects such as Ichthys, so the supply-side pressure on spot prices is set to continue in 2020. Australia’s LNG is mostly tied up through long-term export contracts to China, Japan and South Korea.
Qatar has committed to boosting its own production further, with a goal of 110 million tons per year by 2024, so we may continue to see the same pressures on the spot price in the years ahead.
Developing Markets will Bring Demand
BP has predicted that natural gas will grow 1.7% p.a., an almost 50% increase by 2040, and this will be assisted by a push to cleaner forms of energy and increased infrastructure spending in gas projects, particularly in LNG, which is now being seen as a stable source of supply. The current demand picture is dominated by the established markets of Japan and Korea and this will continue in 2020 and beyond. The markets for imports are expected to move to the developing nations of China, India, and other Asian countries; however the pace of this move will depend on the global growth picture and the ability of these countries to weather the current economic outlook, or a worsening of macroeconomic conditions. Caution would be advised due to the problems experienced in the BRICs nations following the global financial crisis and the oil supply glut of 2014 onwards. More recently, we have also seen economic conditions worsen in the likes of Argentina and Venezuela.
Price Outlook 2020-2025
With the outlook provided, it’s clear that the price will experience a headwind in the next years as Australia and Qatar continue to push production and exports into the market.
The time that it takes for this pressure to recede will depend on the global growth picture. Investment in infrastructure has been supported by the low interest rate environment and this has brought extra supply at a time of slowing growth. China’s GDP picture is still showing no signs of a bottom and this is dragging on the rest of Asia. Globally, the U.S. has been leading on growth but reducing its energy import requirements.
In summary, the downward pressure on prices will continue to drag into 2025 if we see continued LNG exports growth from Australia and Qatar. A bottom in global growth would help to soak up some of this demand but it is hard to see the imbalance cleared over the period.
For price, the likelihood is that any move higher will be driven by increased inflation due to central bank monetary policy, or from an increased risk premium arising from tensions in the Middle East, where Iran’s gas production aligns with the export routes of Qatar. The Strait of Hormuz, which Iran has threatened to close, accounts for 30% of oil trade flows and 25% of LNG.