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LNG Glut to Last For Now, But 'Famine' Coming, Bernstein Says

The global glut of liquefied natural gas (LNG) will stick around for the near- to medium-term as liquefaction capacity grows, yielding a 20-30 million tonne per annum (mtpa) overcapacity until 2018, according to analysts at Bernstein.

Significant new liquefaction capacity is coming online over the next three years in the United States and Australia "...and comes at a time when LNG demand is struggling to grow and is unusually weak in core East Asian markets," wrote Neil Beveridge and his associates in a November note. "Demand will have to pick up in 2016, however, to absorb the new contracted supply."

Demand growth during the first eight months of this year was flat, according to Bernstein. "Growth in the largest LNG markets (Japan, Korea and China) has declined by over 2% year to date on weaker than expected industrial growth and mispricing of natural gas in China, which has curbed demand."

Over the next two years, the oversupply of LNG is likely to hold down natural gas and spot LNG prices relative to oil-linked prices. Spot LNG prices have dropped sharply this year, Bernstein said, trading around a US$1-2/MMBtu discount to long-term oil-linked LNG prices.

However, looking further out, there is cause of interests long in LNG to be encouraged. "We expect the glut to be followed by a famine, "Bernstein said. "We estimate a 75 mtpa deficit in LNG supply by 2025, which will require US$250 billion in investment between now and 2020. With no new LNG projects currently being sanctioned, a new LNG investment cycle should start in 2017/2018."

The market has been tight before, of course. In Spring 2014, Beveridge and his colleagues wrote, "Given the tight nature of the market, spot LNG prices reached record highs this winter in Asia at over US$19/Mcf as Asian customers competed against European buyers for the few spare LNG cargoes [see Daily GPIApril 8, 2014]."

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