Natural gas crashes as Japan demand wanes, Australia supply takes off
Natural gas prices have crashed to 17-year-lows in the past week, underscoring burgeoning supply in the global market just as U.S. exports its first ever shale gas cargo.
On Monday, natural gas prices on the New York Mercantile Exchange settled 4.5 percent lower to their lowest level since 1999 after U.S. weather forecasts signaled warmer weather in the weeks ahead, curbing demand for natural gas used for heating.
The decline brought February losses in natural gas to 26 percent. Prices recovered on Tuesday but the outlook remains depressed.
Japan, the world's largest importer of natural gas, is restarting its nuclear reactors six years after the 2011 Fukushima disaster, with three out of 43 nuclear reactors brought back online since August and more expected to come.
Japan is likely to bring back more reactors online, which will make the country less dependent on liquefied natural gas (LNG, the super-cooled version of natural gas made for easier storage and shipping) for electricity generation.
In January, shipments of LNG into Japan fell the most in more than six years, according to Bloomberg calculations.
This does not bode well for Australia, which has pumped more than $160 billion in LNG investments just before the commodities rout that has taken oil prices down 70 percent since the summer of 2014.
Australian LNG production is expected to grow 50 percent in the five years through to 2020 even as certain producers cut capital expenditures and reduce spending on upstream activities, said Fitch Group unit BMI Research in a note last week.
"A ramp-up in production from gas developments associated with mega LNG export ventures will support a large upsurge in overall gas output," BMI research said.
Demand in China is also tapering off with LNG imports falling 1 percent in 2015--the first time on record--as the economy slows. Buyers have reportedly delayed previously-contracted cargoes because the sustained decline in energy prices means spot prices are now more competitive than those struck some time ago.
Competing energy sources such as coal and renewables are also curbing demand, spurring discussions about contract terms.
In an oversupplied market, BMI Research expects LNG contracts to evolve toward a cargo-by-cargo contract model rather than one based on traditional contracts spanning 15-20 years that require minimum delivery volumes yearly.
The first U.S. LNG cargo from Sabine Pass to Brazil's Petrobas on February 24 underscores that point as it was sold on a spot basis to Brazil's Petrobas even though the facility operated by Cheniere Energy was expected to be exporting long-term contracted cargoes.
"This is something on an issue today, as there is hardly a global shortage of natural gas, and prices have tumbled in the wake of the collapse of the crude oil price, with several producers are offering LNG cargoes in the spot market," said Crag Jallal, senior data editor at VesselsValue.com, an online ship valuation database.