2017: The case of the missing glut

Zach Allen's picture
Zach Allen, President, Pan EurAsian Enterprises
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2017 turned out to be a very good year for LNG buyers, prices having dropped dramatically from earlier highs, and with every prospect that they would stay that way for a while.  The trade press was full of articles about the “glut” of LNG supplies.  Some projected the glut and low prices would be around until the mid-2020s.  It hasn’t worked out that way, and so soon.  Where did the glut go, and who stole it?

We will admit to having been caught by surprise.  While we dared not put a date on it, we felt that the margin between supply and demand in the global LNG markets would favor buyers and keep prices down for a while.

The numbers tell an interesting story.  We use Japanese LNG import data as a proxy for the industry as a whole as they are the world’s largest importing country and account for about one-third of all LNG imports each year.  They publish detailed import data on a monthly basis that show quantities imported broken down by countries of origin, and prices for each source country, which are extremely useful.

In January 2015 Japanese LNG importers paid $15.23 per million Btus (currency conversions by Pan EurAsian) however, by January 2016 that same metric was $7.90.  The low point came with the May 2016 report of imports at $5.91 and the reported cost of spot market imports that same month was $4.30.  By January 2017 the prices had come up slightly and were $7.58 for all imports and $7.30 for spot imports.

Pressure started to build on the markets by mid-2017.  Whereas the Singapore Sling index price for cargoes delivered to NE Asia were in the mid $5 range in the summer, that index started to climb in September, reaching nearly $10 in mid-November.  When those assessments crossed over $9 our sense was the market was beginning to wonder what was happening.  The glut was gone.

However, we don’t think so.  We have examined the data available and we believe that the market remains a buyer’s market, although not as much so as before.  The causes, we believe, are a combination of market configuration and significant changes in buying tactics and practices.

The table on the right shows LNG imports by country comparing the degree to which each country may have imported more, or less, LNG in the first nine months of 2017 versus 2016.  There are some surprises here.

It is no surprise that China has grown its imports year on year, more than any country in absolute numbers, with a remarkable 43% growth.  However, some of that growth has been made possible by reduced imports, year on year, of other countries, leading to a net growth of LNG imports in 2017 (9 months) of 11% more than in 2016.

Still, a 20 million metric ton increase is a tall order to fill.  Our estimate of LNG supplies to the market on the same basis of comparison shows an increase of about 27 million tonnes (metric tons) or 7 MT more supply added than demand.  So, why the pressure?

We attribute the rise in prices to market perceptions of less supply than there is.  Market configuration refers to where the supply is and where the demand is.  Of the 27 million tonnes of added capacity, about 7.4 million comes from Sabine Pass in the US, which is convenient to neither the NE Asian markets nor the Mid-East markets, and thus raises transportation issues.

More telling, in our view, is the change in market buying tactics and practices.  The market is moving from a long-term, bilateral trade to a much more flexible, short-term market.  Buyers are fine-tuning purchases to arrive “just in time” so as to reduce demurrage and inventory carrying costs.  From time to time, buyers will get caught a bit short, and have to scramble for supplies.  In a market where the supplies are not immediately convenient to the main buyers, this scrambling can cause the market to look undersupplied, and in the short term, it may be.

Thus the prices get pushed up, only to drop again when the scrambling stops.  That is how we see 2018: a process of buyers and sellers getting used to operating in this changing market that is more flexible and more short-term.  It will be a year of price volatility, but with prices not reaching the 2015 levels.  The market is fundamentally well supplied to meet buyers’ needs in 2018.

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