PIRA: Spot LNG Demand Remains Low

PIRA Energy Group believes that softer demand for spot LNG will persist while supply options broaden.

In the U.S., another stout storage build weighs on gas futures. In Europe, limits persist on ability of gas to grab back demand in U.K. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

A weak global LNG spot market will not be dissipating anytime soon. While PIRA sees global LNG supply down slightly year-on-year through June, significantly weaker demand is the primary culprit for spot price weakness. Chief among the weaker demand points is the European gas market, which is doing everything within reason to divert volumes away from a spot market that has dropped to a three-year low. PIRA does not see this situation turning around any time soon and even the winter market will be vulnerable to weak spot prices that will trade at a discount to weighted average Japanese and broader Asian contract prices. It is getting to the point where production cuts by LNG suppliers will have to be considered.

Another Stout Storage Build Weighs on Gas Futures

Today’s storage report indicated U.S. inventories increased by 113 BCF, marking the sixth consecutive week of triple-digit builds. More important, however, was the fact that the week-on-week increase topped the consensus forecast centered on ~110 BCF. An ensuing NYMEX selloff seemed assured, yet after an initial drop, enough buying materialized to lift the July contract above where it had traded ahead of the release. Eventually, however, the contract took almost an 8¢ day-on-day hit, settling at ~$4.58/MMBtu.

Limits Persist on Ability of Gas to Grab Back Demand in U.K.

A key focus point in the weeks ahead is coal/gas switching, which has seen some life breathed into it by lower NBP prices. U.K. gas-fired dispatching has been somewhat more supported, having averaged roughly 11.8 GWs and 47.7 mmcm/d of gas offtake in the NTS, but gas-fired generation is far from its ancient glory. With a strong recovery in residual power demand unlikely for the third quarter, it remains to be seen how much more coal-fired capacity can be switched off, creating room for gas-fired output.

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Press Release, June 26, 2014