LNG prices likely to remain historically weak due to oversupply, says Capital Economics

LNG prices should recover from their current coronavirus-related lows by end-year. But given the significant oversupply in the market, prices are likely to remain historically weak, according to the latest research report from Capital Economics.

Average LNG prices are expected to fall this year owing to surging US exports and additional supply from Australia and Russia. However, a slump in China’s demand due to the economic fallout from coronavirus has sent LNG prices into freefall.

This week, spot prices are quoted at below $3 per mBtu, down from $6.8 a year ago. Reportedly, Chinese buyers are rejecting pre-contracted shipments, claiming force majeure (a legal clause invoked when unexpected events lead to contracts being breached).

Meanwhile, Europe is unlikely to take up the slack as stocks are high and demand growth is lacklustre. In 2019, Europe absorbed much of the additional supply in the market, the report added.

Admittedly, there are now many more countries with LNG import facilities – in part thanks to the roll-out of FSRUs (Floating Storage Regasification Units). India, in particular, is a growing market. India is also price sensitive and has recently lowered the tariff on LNG, which suggests it will seek to take advantage of current prices. That said, there are logistical constraints on how much LNG India can import.

"To wrap up, the coronavirus will lead to sharply lower Chinese LNG demand at a time when the market was already oversupplied. As a result, LNG prices are likely to remain low for some time yet. However, prices should revive a little later in the year as global GDP growth gradually picks up and energy generation continues to move away from coal," Capital Economics further commented in the report.