Global LNG markets may start to soften sooner than expected, analysts say

19 Jan 2024  spglobal.com Author Eric Yep  Editor Neil Hunter

Highlights

Morgan Stanley sees slightly oversupplied LNG market in 2024

2024 average JKM forecasts between $11-$12/MMBtu: banks

Meaningful ramp up of LNG supply from 2025 onwards

Global LNG markets could start to loosen as early as 2024 as Asia and Europe emerge from a mild winter with healthy inventories and demand from big gas consumers is capped by slow economic recovery, analysts said.

The easing of the supply-demand balance will help cap prices and spot LNG prices have already eased below the $10/MMBtu level, despite peak winter and Red Sea disruptions. Platts, part of S&P Global Commodity Insights, assessed March JKM at $9.433/MMBtu on Jan. 18.

Analysts at Morgan Stanley now forecast a slightly oversupplied LNG market in 2024 with a roughly 4 million mt surplus, compared to a previous forecast of a roughly balanced marketplace. They cut the 2024 JKM price outlook to $11/MMBtu from $14.50/MMBtu.

"While this is less tight than our prior outlook, it still leaves the market with limited buffer to manage potential disruptions. At the same time, upside risk from winter weather uncertainty is moderating as we move through the peak of the heating season," the bank said in a Jan. 9 note.

Since the Russian-Ukraine crisis in early 2022, LNG supplies had tightened globally as Europe replaced lost Russian gas supply and LNG markets were not expected to normalize before 2026. But this could change.

"The global gas squeeze will enter its third year in 2024. The good news for consumers is that it is coming to an end. A wave of new LNG supply will start from the end of this year with over 140 million mt/year of supply (more than 30% of current global LNG market) being added over the next 3 years," Neil Beveridge, managing director at Sanford C. Bernstein & Co. said in a Jan. 8 note.

Bernstein Research said in 2025 there will be a meaningful increase in LNG supply as projects in Qatar and North America ramp up, which will be absorbed by the market, and take prices lower.

"We expect this to represent the net cyclical downturn in global gas and spot LNG prices, which favor downstream gas companies over upstream suppliers," Beveridge wrote, adding that spot prices could remain elevated at around $12-$14/MMBtu this year until new supply arrives at the year-end, but over the next 3 years could fall from $15/MMBtu to $8-$9/MMBtu.

Macro backdrop

Analysts were still concerned about broader macroeconomic and geopolitical risks.

"Commodity markets will face the impact of tighter monetary policies in 2024. This is likely to impact commodity demand," Australia's ANZ Bank said in a Jan. 19 report.

"However, the slowdown is expected to be relatively short-lived and shallow. The market could ignore these short-term headwinds. The conditions for rate cuts could emerge from mid-year, which will likely create tailwinds for commodity markets in the second half of the year," ANZ Bank said.

It forecasts spot LNG prices to average $11.3/MMBtu in 2024 and $14.1/MMBtu in 2025.

On Dec. 4, Citigroup's outlook report forecast JKM LNG prices for 2024 at $11.7/MMBtu in its bear case, assuming a mild winter either in Asia or Europe and lower LNG demand taking prices near coal parity. Its base case forecast for 2024 was $16.4/MMBtu, with potential price spikes due to polar vortex event risks.

"The period between now (Dec 2023) and Chinese New Year (mid-Feb 2024) is likely to see a more optimistic global economic outlook and US dollar weakness, but we expect the impact of higher rates to be felt as the global economy moves into H2 '24," Citigroup said.

"However, we expect limited impacts from China macro on oil and LNG demand due to strong EV penetration on the oil side as well as robust domestic production and pipeline import growth on the gas side," the bank added.

China, US and Qatar

"Looking further out, we note that China should once again become the world's largest LNG buyer in the second half of the decade, while Europe will eventually find a way to reduce natural gas dependency on increased renewables," Bank of America said in its 2024 commodities outlook.

"Importantly, the LNG market continues to benefit from new entrants that want natural gas for base load or peaking purposes," the bank said.

It said the Europe-Asia LNG competition is likely to dominate the trade through the rest of this decade, causing volatility in TTF-JKM spreads, with a higher average price floor for global gas due to higher coal prices.

"There is also a shifting LNG supply equation in the global gas story. LNG volumes should expand, mostly thanks to the US and Qatar," BoFA said, forecasting year-on-year LNG supply growth of 3% in 2023, 2% in 2024, and 4% in 2025.

"Ultimately, the world economy is moving to an electricity system that relies more on LNG and renewable power, less on piped gas, and where natural gas storage is simply not growing. These factors make global gas and power markets much more fragile and leave them much more exposed to the vagaries of global gas supply and demand," the bank added.