Coal to gas switching in 2015

In a new quarterly analysis of global LNG fundamentals, Wood Mackenzie has said that the softening in Asian LNG spot prices will find temporary relief in the summer of this year with demand growth in the Pacific outpacing that of global LNG supply. However, the report does say that as new Australian LNG supply increases towards the end of the year, prices will come under further downward pressure, converging back to European spot prices.

Massimo Di-Odoardo, Principal European Gas Analyst, Wood Mackenzie, said the following on the global market picture, “for the first time since 2009, Asian LNG spot prices are trading at a discount to European spot prices, like the NBP. Benign weather conditions in North East Asia and ample supply availability, combined with low oil prices continues to put pressure on Asian LNG prices. In contrast, high seasonal demand and the cap imposed on Groningen production for the first half of 2015 are resulting in European spot prices trading relatively high and close to oil indexed contract prices, despite abundant LNG imports. Di-Odorado did however warn that a typical summer price decline is not assured, but instead, Asian LNG and European spot price levels will be sustained through the summer. Also, he said that rising winter prices are not assured, and that instead prices in Q4 will fall, despite the beginning of the winter season.

Europe

In Europe, Wood Mackenzie has said that the market will test the soft floor that has been provided by the coal to gas switching potential in the UK. Di-Odoardo has said, “with coal prices trading around US$60 /t and EU ETS carbon prices in excess of US$8 /t, the US$ 27.7 /t carbon price uplift will be introduced in the UK in April will results in coal to gas switching potential at gas prices around US$7/ thousand Btu. However, Russian oil indexed prices will be lower than that from the summer and it is likely that they will pull prices down in Q4 2015. As oil linked Russian contract gas incorporate a six to nine month oil price lag in its formula, players have been maximising offtake of gas from storage through Q42014/Q1 2015 in expectation of cheaper to come Russian gas. The subsequent high storage injection requirement will result in a growing call on Russian gas through the summer, at a time of reduced LNG imports, a consequence of higher LNG requirements in Asia, resulting in the US$7/ thousand Btu price floor on hold. However in Q4, the combination of low prices and upward flexibility on Russian contract gas is expected to push prices below US$7, despite sustained coal to gas switching in the UK.”

Asia

Yingying Zhou, Asia LNG Research Analyst at Wood Mackenzie said the following on the outlook for Asian demand, “the restart of some nuclear capacity in Japan and the commissioning of new nuclear and coal capacity in South Korea will result in lower demand in 2015. However under normal weather conditions we expect more LNG demand in China, while the ramp up of new contracts and more regasification capacity will facilitate new demand in South East Asia, India and the Middle East. Overall, we expect Asia Pacific LNG demand to be some 6 million t higher in 2015 compared to last year, despite Q1 being lower.”

Zhou did add, “while ordinarily we’d see a pick up in prices with seasonal demand in winter, this year we forecast that the ramp up of LNG from Australia will outpace Pacific LNG demand growth in Q4 and, in the absence of particularly cold weather, spot prices are expected to soften again, and converge with European prices below US$7 /thousand Btu.”

Edited from press release by Claira Lloyd

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