We will be presenting a very bullish outlook for natural gas later today in our webcast for Stream’s 2018 Energy Outlook. The key to our call is that a massive natural gas demand surge has started and will lead to world LNG markets being corrected closer to 2020 than the current conventional wisdom of closer to 2025. One of the reasons we see this happening quickly is we share Shell’s view that global LNG markets, as of mid 2017, are not in an oversupply situation and there is data support (Japan LNG spot prices, NW Europe storage) for this view. Two weeks ago, Shell said “Actually, over the last 18 months, every LNG cargo that could technically be produced in this world has been produced and has found a well paying customer”. Therefore, we have a different starting point than conventional wisdom that says LNG markets are oversupplied in 2017. And if you combine a different starting point with a different view on a massive surge in natural gas demand, then you end up with a much different view of when LNG markets will move to undersupply. We will be posting a blog post today’s webcast on why we see a massive surge in natural gas demand.
A massive surge in natural gas demand has started. Long term readers of Energy Tidbits will likely be surprised by the very bullish natural gas call in this afternoon’s webcast. I was very negative for years, but move to a positive stance a year ago driven by the themes of Floating Storage Gas Regasification Units (FSRUs) and increasing US exports of LNG and to Mexico via pipeline. Those themes are continuing and FSRUs are expanding in their scope. Natural gas has already been on a path of strong demand growth. That path is continuing. But later today, we will be highlighting other major new demand factors that will drive the massive surge in global natural gas demand. This isn’t just an item for investors outside of Canada. Nor is it an item for a couple years down the road. We see these themes impacting Cdn natural gas in 2018. The 2018 Energy Outlook is at 2pm mountain today and can be accessed via[LINK].
Shell’s LNG head Maarten Wetselaar says the LNG market is in balance and all LNG cargos have found well paying customers. Two weeks ago, Shell’s LNG head, Maarten Wetselaar (Integrated Gas & New Energies Director) presented to the Australian financial community at Bloomberg’s Sydney Australia office. The presentation and Q&A in particular was excellent, but the presentation was overlooked because it was only available over the Bloomberg terminal and Shell did not post Wetselaar’s presentation. Bloomberg only posted a small portion of their interview with Wetselaar [LINK]. We prepared a transcript of Wetselaar’s comment on the balanced LNG market. He said “We have been very pleased to see very strong demand for LNG in the last two years from Asia, particularly from China, but also from new countries that demand LNG in order to make their energy mix go around. There is Pakistan, there is Egypt, and even this year, we see the demand response to the supply increase being very robust so this year we have not seen an oversupply in this product. Actually, over the last 18 months, every LNG cargo that could technically be produced in this world has been produced and has found a well paying customer. So this market is in more balance than people perhaps perceive”.
The key data support to Wetselaar is that NW Europe storage is not seeing surplus LNG cargos looking for a home. In the Q&A, Wetselaar said the data support for his comment that the market is absorbing all of the new LNG supply is to look at NW Europe storage. Wetselaar did not use the description dumping ground, but it is the right term. Webster’s defines “dumping ground” as “a place to which unwanted people or things are sent”. He noted that if LNG was in oversupply, there would be surplus LNG cargos looking for a home and these surplus LNG cargos would find their way to NW Europe storage. Shell is not seeing any YoY increase in NW Europe storage. Hence, he is firm in his view that demand was absorbing all the new LNG supply in 2017. We pasted the NW Europe storage data into the below graph and it shows exactly what Wetselaar said – the monthly YoY changes in storage do not show increases in the net storage withdraw/injections, which implies that there isn’t any dumping of surplus LNG cargos in NW Europe storage. We have not been following NW Europe natural gas storage, but now have it on our regular data check list because of Wetselaar’s comments.
NW Europe YoY Changes In Monthly Storage Net Injections/Withdraw
Source: Bloomberg, Stream Asset Financial
We also believe Japan LNG spot price indicates that the market is absorbing all new LNG supply. We don’t disagree that LNG was oversupplied in 2015 and 2016, but, in addition to the NW Europe storage data, we see other data suggesting that all of this new LNG supply is being absorbed by the market. We regularly track Japan LNG spot monthly prices as published by Japan’s Ministry of Economy, Trade and Industry and include our graph below showing the YoY change in Japan monthly LNG spot prices. Japan LNG spot prices went down YoY in 2015 and 2016, which was a clear sign there that LNG supply was exceeding demand. But in H1/2017, the Japan LNG spot prices are higher YoY by about 20%. We look at this data and say it is reflective of a LNG market that is balance or at least where the market is absorbing LNG cargos. If LNG markets were still oversupplied like they were in 2015 and 2016, we wouldn’t see Japan spot LNG prices up 20% this year?
Japan Spot LNG Prices – YoY Monthly Change
Source: Japan Ministry of Economy, Trade and Industry, Stream Asset Financial
The big test is coming in 2018/2019 with 8.1 bcf/d of new LNG supply to come on stream. In our webcast, we will be reviewing factors that should lead to additional LNG demand of 3.5 to 4.5 bcf/d per year more than expected. This additional LNG demand may not all kick in right away but certainly in 2019 and 2020. Please note this is additional demand every year, not just a one shot boost. Even still, this massive test of increasing demand will be tested in 2018 and 2019 with under construction LNG supply projects expected to add 3.5 bcf/d in 2018 and 4.6 bcf/d in 2019. Then new LNG supply goes down to 2.6 bcf/d in 2020. Inevitably there will be delays to the startup for some of these projects. But if not, it will be a big test. It may well be that the timing for the increased surge in natural gas demand may not line up exactly with the timing of the new LNG supply but it means that any oversupply should be temporary and quickly fixed. Below is our running table of the LNG liquefaction projects that are under construction.
Under Construction LNG Liquefaction Projects
Source: Company Reports, Stream Asset Financial
A better starting point moves LNG to undersupply quicker, especially if combined with a massive surge in natural gas demand. We are highlighting the starting point for LNG markets as it makes a big difference to looking ahead to when LNG moves to undersupply. Conventional wisdom is that LNG is oversupplied in 2017, but we are in the Shell camp that LNG is not oversupplied today because the market is absorbing the increasing LNG supply. We don’t see the Japan LNG spot prices and NW Europe storage data suggesting a robust market, but supportive of Shell’s view. If you combine a different starting point (LNG is not in oversupply right now) with a different view on a massive surge in natural gas demand, then you end up with a much different view of when LNG markets will move to undersupply. Later today, we will be presenting the reasons for why we see a massive surge in natural gas demand that should lead to increased LNG demand of 3.5 to 4.5 bcf/d per year. US HH gas prices continue to be increasingly linked to global gas prices and this will increase with the under construction 4.6 bcf/d of US LNG capacity to be added thru 2020. We see this as a game changer to natural gas prices in the mid term (2019 to 2024), and why HH gas prices could be ~40% above the post 2019 long dated strips. Cdn gas prices should be dragged up with HH but the tone and valuations to Cdn natural gas should reflect this massive global natural gas demand surge in 2018 and 2019.