Analysts with BofA Merrill Lynch Global Research said Thursday the onslaught of U.S. natural gas exports may be too much for the Asian market to digest, which means there is more pressure for European demand to balance the global markets.

BofA’s Clifton White and his team of analysts noted that Asian spot prices have collapsed by more than 50% from their 2018 highs, even as oil prices have recovered.

Liquefied natural gas (LNG) export supply growth in 2018 of an estimated 22 million metric tons/year (mmty) “proved too much to handle,” said the BofA team. “Now, we expect another 46 mmty supply in 2019 and 27 mmty in 2020, with most of the volumes coming from the U.S. America's market share will likely reach 17% in 2020, joining Australia and Qatar as a top LNG supplier.”

The domestic LNG export arbitrage “might need to close for brief periods in order to balance the global gas markets,” White said. “But we think any closure would likely be temporary due to the size of the U.S. LNG supply and the flexibility of the contracts.”

BofA’s team is estimating European gas prices may need to decline by “at least” $1.2/MMBtu this summer to discourage U.S. LNG exports.

China accounted for nearly 70% of global LNG demand growth last year, a trend expected to continue for the next two years, but 12 mmty in 2019 and 8 mmty in 2020 is likely to fall short of worldwide LNG supply growth, the BofA team estimated.

“India, Pakistan, and South Korea will increase LNG demand, but Taiwan is approaching import constraints and the return of nuclear generation capacity will allow Japan to reduce LNG imports.”

Declining gas imports are upcoming into Argentina, as output from the gassy Vaca Muerta formation advances, while the start up of pipelines into Mexico from Texas will also tamp down exports.

Meanwhile, prospects to export U.S. gas into overseas markets are dissipating, as Egypt flips back to becoming a net exporter again from the ramp in output from Zohr, while Leviathan gas production offshore Israel is expected to begin by the end of the year, reducing regional gas demand. Regional mega-gas discoveries, including offshore Cyprus, will compress longer-term demand as well.

All of the gas supply ready to sprout may put more scrutiny on European gas demand, according to BofA. U.S. LNG economics “will provide a pricing floor. An influx of LNG this winter already has European inventories at seasonal highs heading into the summer and will limit the ability of Europe to import additional cargoes.”

Rising U.S. gas storage levels over the next few months “may lead to distressed late summer global gas prices and a further disconnect from oil prices, in our view.”

Legacy Players Losing Ground

A surfeit of supply and stiff environmental regulations should benefit the North American gas industry as it expands overseas, according to Moody's Investors Service. The credit ratings analyst on Thursday published the first in a series of reports about the growing North American gas market, which has begun to shove the world’s legacy supply leaders to the sidelines.

"The North American natural gas industry is in the midst of transitioning from a regional industry toward a global one," said Moody’s Vice President Amol Joshi. "Plentiful supply is pushing into new markets beyond the reach of North American pipelines, while stricter environmental regulations will initially favor natural gas until renewable energy technologies gradually become more competitive."

Gas supply from the Lower 48 states has increased steadily since the boom in unconventional drilling in tight and shale gas formations upended the U.S. supply game, and with it pricing. That in turn has resulted in a profound makeover of the worldwide marketplace, Joshi said.

At the same time, increasing LNG exports, along with piped supply into Mexico, are contributing to rising demand that is allowing supply/demand to nearly be in sync, according to Moody’s.

“Demand for U.S. natural gas is rising for power generation, bolstered by environmental regulations that promote or mandate the switch to natural gas from coal and other refined fuels that emit far more carbon, while industrial use is supportive. Lower prices on the back of increased supply have likewise boosted demand, with solid demand set to support prices over the long-term.”

However, the gas market is nowhere near a mirror image of the global oil marketplace, Moody’s analysts noted.

“Although natural gas is favored over coal, the global effort to curb greenhouse gas emissions implies significant risks to the global oil and gas industry. And while supply is set to meet demand as liquefaction facilities are rapidly developed, transportation costs and complex logistics likely will keep natural gas prices from truly optimizing in line with oil.”