Natural gas prices are observing large spread decline across various geographies over the varying demand and supply dynamics. While the domestic market is running short of natural gas, which is also supporting the ASX oil & gas stocks such as Santos Limited (ASX: STO), the international markets such as of the United States is under natural gas supply glut, which has constantly exerted pressure on the Henry Hub spot.
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The shortage of natural gas in the domestic market is mainly over the higher LNG exports, which is again forecasted by the Department of Industry, Innovation and Science (Or DIIS) to surge by 8 per cent from 75 million tonnes (2018-19) to 81 million tonnes in 2020-21.
The booming LNG industry is depleting the natural gas supply chain, which is propelling the natural gas prices in the domestic market. The increase in gas prices combined with a higher spread between LNG spot and oil-linked contract prices, at which most of the LNG exporters sell their LNG, could now bring potential headwinds for the LNG sector.
Short-Term Challenges Ahead for LNG Industry
· Nuclear Again Gaining Momentum in Japan
Japan, which is the primary market for Australia’s LNG export, is now observing resurrection in the nuclear-based energy generation. Australia earned 43 per cent of its LNG export revenue from Japan in 2018-19; however, the LNG imports in Japan is now consistently declining.
The overall LNG imports in Japan fell by 7.6 per cent on a yearly basis in the first nine months of 2019 and is further anticipated by the DIIS to drop by 6 million tonnes to stand at 75 million tonnes in 2021.
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· Weak Demand Over Large Spread Between LNG Spot and Oil-Linked Contracts
In Asia, the spot prices of LNG improved slightly from the record lows observed by the market during the end of September 2019 quarter; however, still remained at multi-year low, over the industry anticipated LNG supply glut across international energy markets.
The LNG spot prices in Asia averaged about $8.80 a gigajoule during the December 2019 quarter, up by 25 per cent against the previous quarter; however, 40 per cent lower on a yearly basis. The prices boosted over minor supply disruptions across major LNG exporting countries, albeit, the arrival of long-anticipated overcapacity in LNG supply kept the prices under check.
Currently, the LNG spot prices in Asia are witnessing a large spread with the long-maturity oil-linked contract prices, which most of the LNG players in Australia deal, which in turn, is further reducing the demand for gas contracts.