Gas Glut
What LNG Has in Common With Oil

Oil isn’t the only commodity whose market has undergone a profound change over the past year. Liquified natural gas (LNG) was seen as the next big thing by many, as the supercooled hydrocarbon could be loaded on ships and sent around the world. Demand in Asia was high, and so too were the prices, incentivizing countries like Australia, Qatar, Russia, and the United States to beef up export capacity in an attempt to take advantage of what was seen as a burgeoning market. But Asia’s thirst for LNG seems to have been slaked in 2015 and the global market is now well oversupplied. As the WSJ reports, that has natural gas producers feeling the pain:

[T]he pessimism now surrounding the LNG industry was unmistakable at this week’s Gastech conference, a major annual industry event held in Singapore. One regular attendee, an LNG strategist at a Malaysian energy company, said she had never been to a gloomier energy event.

“The entire industry is worried because it is hard to tell when China’s demand will pick up again. Rising demand from smaller countries such as Pakistan, Egypt, and Bangladesh is not enough to offset the declining demand from north Asia,” she said.

One of the problems for LNG is the sums of money involved in the construction of import and export terminals—tens of billions of dollars needs to be invested on either end of an LNG shipment in order to liquify and eventually regassify the hydrocarbon. Here in the United States, construction of LNG import terminals was well underway before the shale boom kicked off, but the domestic glut of gas convinced companies to change tactics and start construction on export terminals.

That made sense when LNG was trading around $15 per million BTU—liquifying, shipping, and regassifying natural gas typically adds around $5 per mmBTU, and with domestic prices hovering around $3, the added cost of sending it abroad was justified when Asia was paying near $15 per mmBTU. Now, prices there have dropped under $8 per mmBTU, and LNG’s export boosters are left shaking their heads at the remarkable market turnaround.

Meanwhile, the LNG oversupply could fundamentally change the way the commodity is priced, as Reuters explains:

Producers and importers of liquefied natural gas (LNG) are preparing to trade the fuel more actively on a spot basis as a looming supply surplus threatens to overwhelm decades-old bilateral contracts and pressure prices lower…Excess supply, along with rising demand, is key to establishing a liquid commodity market as in tight conditions producers and consumers tend to enter long-term fixed supply agreements rather than trade openly.

Whether it’s oil or gas, it’s certainly a buyer’s market today.

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