A lack of storage capacity worldwide for liquefied natural gas (LNG) could push most of the global oversupply to U.S. shores, but it may not be as much as some are forecasting, Barclays Capital analysts said last week.
"We believe U.S. LNG imports will grow in 2009, but not as rapidly as liquefaction additions and economic trends in Asia and Europe alone would suggest," analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker wrote in a note to clients.
The amount of LNG expected to be imported into the United States this year is "unusually wide," they wrote. "Some believe higher prices in Europe will attract all excess spot LNG and expect to see little growth for U.S. LNG imports. Others argue that lack of storage capacity elsewhere in the world will push most of the global oversupply into the U.S. despite low prices."
Both arguments, said the Barclays team, have merit, "but neither reflects the current landscape of LNG markets in its entirety."
As some note, storage capacity for LNG outside the United States is limited, and given the amount of liquefaction capacity additions and severe contraction in demand, "it is unlikely that the rest of the world would be able to absorb all of the excess," wrote the trio.
"However, pockets of strength in consumption do exist, and the market might be underestimating the ability of Europe to take more gas, particularly in light of its low inventories, growing gas-fired power generation and expanding regasification capacity," the analysts said.
How much LNG will arrive on U.S. shores this year remains to be seen, and with the LNG spot market still in its "fledgling stage," there's limited history to determine how these factors may interact.
"To be clear, LNG trade has been around for a while, but until recently the Atlantic and Pacific basins largely functioned as separate markets governed by long-term supply agreements with very limited spot trade taking place," wrote the analysts. "In the past few years, long-term contracts, which have traditionally dominated the industry, have been renegotiated to include the flexibility to divert cargoes when economics dictate."
For 2009, the increased number of market participants that want to arbitrage regional gas prices and the expected global oversupply "is about to test just how global the gas market has become."
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