London, 21 April 2010

U.S. gas traders might experience a touch of deja vu this summer when, for the second year running, an unneeded, bearish barrage of natural gas shipped from overseas fails to land on U.S. shores. Record levels of liquefied natural gas were expected at U.S. terminals this summer as increased global production leaves more LNG for the United States, the market of last resort, to absorb. But as European and Asian markets show surprising demand resilience despite the economic downturn, U.S. natural gas prices slump and supply growth stutters, the U.S. might be spared from additional incoming cargoes. "At the start of the year, the general consensus was that because of new supply trains coming on and lower demand in traditional markets, a lot of LNG would come into the U.S.," said Asish Mohanty, senior research analyst at Wood Mackenzie.

"But, over the past month or two, we have noticed continuing issues with existing production and teething problems at new trains," he said, adding that emerging import markets, like Argentina and Kuwait, will also help suck-up some excess supply.

Increased production in Indonesia, Yemen, Russia and Qatar was expected to flood the market this year with up to 6 billion cubic feet per day (bcfd) of extra supply. However, with outages, delays to new projects and increasing maintenance, the outlook does not look quite so ominous.

Long-term production problems continue in key U.S. supplier Nigeria, while output in Algeria has slowed. A massive new Qatari production train, which earmarked supply for the United States, shut down last month before it even loaded a cargo.

In Egypt and Oman, governments are unexpectedly looking to divert gas initially meant for export to domestic use. Uncertainty remains about how much LNG production might be lost to outages and supply cut backs this year, but some analysts see a potential 1.5 bcfd lost from anticipated supply.

"At the start of this year, global LNG supply was poised to grow by more than 6 bcfd, but given the history of underperformance, we had handicapped that to a range of 4.5 to 5.5 bcfd," said Barclays Capital analysts, who have added downside risk to their U.S. import estimates.

Barclays said last month it expects the U.S. to import over 3 bcfd of LNG in 2010, up from about 1.3 bcfd in 2009. U.S imports hit a record 2.1 bcfd in 2007.

Low US Gas Prices

U.S. gas futures have lost a third of their value this year, from near $6 per mmBtu at the beginning of January to around $4 per mmBtu this week, on ample supply and weak demand, prompting LNG shippers to divert supply to other markets.

The spread between U.S. and British prices, which helps determine spot deliveries of LNG in the Atlantic, has widened in favour of Britain in recent weeks. According to Bank of America Merrill Lynch analysts, 24 bcf of LNG was diverted away from the United States in March and April as prices there slumped. The trend is set to continue, with British prices higher along the forward curve.

Tudor Pickering Holt Energy analysts on Friday said: "We are lowering [forecast] 2010 U.S. imports from 2.5 bcfd to 1.8 bcfd on the view that better-priced Asian/European markets will attract the market's spot cargoes."

And going beyond this summer and toward next winter, stronger winter demand in Europe and Asia, coupled with ever rebounding industrial demand could mean that the wave of LNG, expected for over two years now, might not come at all.

European Appetite

European markets have shown a growing appetite for LNG as industrial gas demand rebounds from the recession, new import terminals come online and low gas storage is replenished.

A record cold winter in Europe helped deplete gas stocks below year-ago levels, giving it the space to absorb more LNG. In Britain, gas storage is currently about 19 percent full compared with 39 percent at the same point last year, according to data from Gas Storage Europe. Storage at Zeebrugge in Belgium is currently only 9 percent full.

"LNG is just pouring into the U.K. right now. I think a lot will continue to come in through the summer," said Zach Allen, LNG analyst for NATS in Raleigh, North Carolina, adding that this will help temper U.S. imports.

According to Waterborne LNG analysts, European LNG imports will rise 39 percent year-on-year in April and 27 percent in May as Qatar continues to pump increased volumes into Britain, Belgium and new importer Italy.

Asian demand is also rebounding quickly, with imports by large utilities in Korea and Japan hitting 20-month highs. Fuel switching in India has bolstered LNG supply there, while new import capacity and increased demand in China is expected to suck up some excess supply in the market.

Chinese oil company CNOOC Ltd has said it plans to import 8 million tonnes of LNG this year, up from total Chinese imports of 5.5 million tonnes in 2009. "We now believe global LNG demand will keep pace with the 4.9 bcfd in supply additions scheduled for 2010," said Bank of America Merrill Lynch analysts, who have added downside risk to their U.S. import forecast of 2.4 bcfd for the year.

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