The global economic crisis has led to a significant drop in global demand for natural gas, which has led to a huge slump in natural gas prices, according to a new report from GBI Research titled, “Natural Gas Industry to 2016 – Abundance of Unconventional Gas Changing the Industry Landscape.”
Excess production and low demand have forced natural gas prices to remain low at an average of $4 to $4.50 per MMBTU, even with crude oil prices hovering at around $75 to $80 a barrel. LNG demand too has suffered, as a result of it being interdependent on natural gas demand with prices also dropping significantly. Prices of spot LNG in Asia for immediate delivery slumped to as low as $3.8 per MMBTU in May 2010 from about $25 MMBTU in 2008, as the global recession cut demand from Japan and South Korea.
While the global LNG demand dropped substantially, the supply of LNG improved with new LNG liquefaction plants becoming operational in Qatar, Yemen, Indonesia, and Russia, says the report. A major part of this increasing liquefaction capacity was intended for the US market, which was at one point struggling with decreasing natural gas production. However, with the spurt in production from shale basins, the new liquefaction terminals will further deepen the global LNG supply glut.
The excess of global natural gas supplies has led LNG spot prices to new lows. The drop in spot LNG prices has made buyers rethink long-term LNG contracts. Importers can now easily tap the global market for spot cargoes at lower prices than the long-term supply agreements. Consequently, the LNG industry will be buyer driven until 2011, as supplies continue to exceed demand as in 2009.
The ‘tough phase’ of the industry could be potentially aggravated by upcoming additional new LNG facilities, concludes the report. This is in sharp contrast to the supplier-driven LNG market of 2008. Along with this, the major factor of increasing natural gas supplies from unconventional sources is expected to adversely affect the industry. These factors have significantly altered the supply situation, inducing a surplus in supply.