IEA: market rebalancing will take longer for gas than for oil

The process of market rebalancing is likely to take longer for gas than for oil, according to the International Energy Agency (IEA).

While the IEA expects global oil markets to start rebalancing in 2017, it does not foresee oversupply in traded gas markets improving meaningfully before the end of the decade, the agency said Wednesday in its Medium-Term Gas Market Report.

According to the IEA, gas is faced with the twin challenge of a large wave of price-inelastic supplies coming on line – the result of investment decisions taken when oil and gas prices were much higher – and structural changes on the demand side, mainly in the power sector.

These issues weigh on the degree of demand responsiveness to low prices. Slower generation growth, rock-bottom coal prices and robust deployment of renewables constrain gas’s ability to grow faster in today’s low-price environment,” the IEA said.

Reversing a long-standing trend, gas usage in power is projected to grow more slowly than total demand; its share of incremental demand falls to one-third compared with almost half between 2009 and 2015.

Global LNG export capacity is forecast to increase by 45% between 2015 and 2021, 90% of which originates from the United States and Australia. Almost all of the projected increase comes from investment decisions already taken, the IEA said.

A substantial amount of capital has already been allocated for these projects, many of which are at an advanced stage of development and backed by long-term contracts. Today’s low prices, therefore, will have little impact on the execution of these projects, the Paris-based agency said.

Barring any significant supply disruption, markets will “struggle to absorb these incremental supplies“.

Europe’s flexibility to take in additional LNG is “limited” by slow demand growth, cheap coal, and competitive Russian supplies.

Demand in Japan and Korea – which today account for almost 50% of global LNG imports – is forecast to stagnate or even decline sharply depending on the scale of nuclear comeback in Japan. Latin America and the Middle East offer pockets of growth, but neither of these regions is a natural home market for base-load LNG imports“.

It is therefore clear that the trajectory of global gas markets – and how fast they rebalance – will depend on the scale of expansion in China and the rest of developing Asia,” the IEA said.

According to the IEA, the region has potential for large growth in demand, but unlocking it requires progress on market and environmental regulation.

A period of low prices could facilitate this task. It should also enable the build-out of new import infrastructure in regions with no or limited access to supplies. By 2021, LNG imports among developing Asian economies (including China) are forecast to increase by more than 100 bcm, the agency said.

Despite this growth, projected demand is not sufficient to balance the market, particularly during 2017 and 2018.

As a result, global LNG export infrastructure will need to run below capacity. Utilisation is expected to recover by the end of the forecast period, but it is unlikely to reach the high levels of 2011-12,” the IEA said.