Vitol sees new LNG supply in 2015 exacerbating global surplus

By ANNA SHIRYAEVSKAYA
Bloomberg

Vitol expects new supply of liquefied natural gas (LNG) arriving next year to exacerbate a growing surplus as a slump in demand pushed prices of the super-chilled fuel to the lowest in almost four years.

Plunging crude oil and mild winter weather in the Northern Hemisphere are already hurting prices for the fuel, according to David Thomas, the head of LNG at Vitol in Geneva. Prices have fallen 49% since February, according to World Gas Intelligence in New York. Current rates at about $10/MMBtu are justified, Thomas said.

Global LNG supply will increase 7.3% next year and a further 10.6% in 2016 with new volumes from Australia and the US, according to Energy Aspects, a consulting company based in London. In northeast Asia, the world’s biggest LNG consuming region, mild weather and high stocks has caused the slump in spot prices.

“How long the surplus supply will last is unclear, but certainly we are seeing probably at the back end of next year a lot more supply coming into the market,” Thomas said Nov. 24. “The world now doesn’t believe that it’s short of LNG.”

LNG prices fell 5.2% to $9.95/MMBtu in the week to Nov. 24, the lowest since March 2011, according to WGI assessments of spot cargoes delivered in the next four to eight weeks. They traded at a record $19.70/MMBtu in February, WGI data show.

Japan’s LNG imports declined 7.9% from a year earlier in October, according to the Ministry of Finance’s preliminary report. South Korean imports dropped 13%, according to data on Korea Customs Service’s website.

Glencore, Koch

Vitol, the biggest independent oil trader, began trading LNG in 2005, the first among the independent energy trading companies to enter the market, Thomas said. The unit has four people in Geneva and two in Singapore after expanding it “by one person a year over the past five years,” he said.

The company remains the “main player” as competitors including Glencore and Koch Industries entered and some banks exited, he said.

Glencore started trading LNG last year after hiring traders from Morgan Stanley. Koch added global gas and LNG to its portfolio in 2012.

Mild weather, steady production from Papua New Guinea and full storage tanks in northeast Asia are pressuring prices, according to Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects. He yesterday cut his 2015 price forecast for northeast Asia LNG by 5% to $13.40/MMBtu. The outlook for the fourth quarter was cut to $13.30 from $16.50, while prices will average $11 in 2016.

Brent oil fell 29% this year, weighing on LNG prices linked to the world’s biggest commodity in contracts.

Crude Parity

“If you look at long-term prices in Asia, typically they average about 80 to 90 percent of crude parity, and spot prices historically have been 5% to 15% below that on an annualized basis,” Vitol’s Thomas said. “We had a period last year when they were 20% above, that clearly isn’t sustainable” as utilities can also burn other fuels, he said.

China probably won’t match Korean spot prices like they did last winter as buyers take advantage of cheaper alternatives, including coal and gas linked to oil, Thomas said.

Thermal coal delivered to Qinhuangdao, China’s main port, fell 15% this year, according to data from the McCloskey Group on Bloomberg.

CLSA, a Hong Kong-based brokerage, said in May that Central Asian gas was about 33% cheaper than imported LNG at the time. Such prices aren’t publicly disclosed.

Brazil Rains

The slide in demand isn’t limited to Asia, according to Vitol. Argentina has committed to buy similar volumes as in previous years “but actually the demand is lower there,” after a mild winter in the southern hemisphere, Thomas said.

In Brazil, the other main South American buyer, there’s not “a lot of incremental demand” and it’s uncertain if they will make purchases during the rainy season, he said. It typically runs from October to March.

“You can always place volumes somewhere, in the past shipping was constrained, in the next couple of years we don’t see shipping necessarily being a constraint,” Thomas said. “If the producer wants to sell then we will find somewhere to put the cargo.”

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