Source: Golden Ten Data
The price of natural gas in the US has dropped by about 22% so far this year, and European countries will be the biggest beneficiaries of low-priced natural gas.
After a warmer than expected winter around the world, oversupply in the gas market led to a sharp drop in prices.
Previously, strong demand for liquefied natural gas (LNG) boosted its prices and profits, spurring a wave of investment in the industry. Morgan Stanley said in a recent report that more than 150 million tons of LNG production capacity is currently under construction every year, which marks a “record wave of expansion.” For a market with a current production capacity of over 400 million tons/year, this represents a “significant increase in supply”.
“We expect the gas market to be oversupplied to the highest level in decades in the next few years,” said a commodity strategist at Morgan Stanley.
The current US gas futures price is 1.83 US dollars per million British thermal units, down about 22% so far this year.
A winter with higher than normal temperatures curbs heating demand in major LNG consuming countries, thereby curbing demand for natural gas.
Zhi Xin Chong, head of S&P Global Emerging Asia's natural gas and liquefied natural gas market, said in an interview: “Global gas prices are on a downward trend due to mild winter climates in northern hemisphere regions such as the US, Europe, and North Asia.”
He added that the resulting amount of above average storage “had a significant impact on prices,” and prices have been on a downward trend since October last year.
The United States, the world's largest consumer of LNG, has just experienced the hottest winter on record, and Europe experienced the second-hottest winter on record. Similarly, Japan's average temperature last winter was 1.27 degrees Celsius higher than normal, the second-hottest winter on record.
Judging from monthly data, the spot price of natural gas at the US benchmark Henry Center hit a record low in February, at 1.72 US dollars per million British thermal units. Lower prices may benefit some energy consumers.
“European countries will definitely benefit the most from cheaper gas,” Chong said.
After Russia cut supplies, Europe's LNG imports expanded to 35% of its total gas imports, most of which were purchased at spot prices. Thus, lower prices help European countries maintain fuel imports at reasonable prices.
Other major beneficiaries include India and Southeast Asia, Morgan Stanley said. Falling LNG prices are most beneficial to India and Thailand, as imported natural gas accounts for 30% to 50% of their total energy imports. Demand for natural gas in India is the most elastic, which means that consumers will buy more gas as prices fall. Thailand is one of the largest consumers of natural gas per capita among emerging market economies.
Although sufficient global LNG storage capacity highlights the bearishness of its price fundamentals, Lu Ming Pang, senior analyst at Rystad Energy, said demand is likely to pick up as second-tier and emerging market countries such as China are attracted back to the market by low prices.
“All of these factors seem to set a bottom line for the price of natural gas,” Chong said.