Various headwinds to impact on demand

Thursday, 14 May 2020
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LNG demand faced several headwinds during the first quarter of this year, GasLog said in a review published with its first quarter 2020 results presentation (see page 7).

A warmer than average winter in the northern hemisphere, high natural gas inventory and LNG levels in several of the largest end markets and the outbreak of COVID-19, combined to depress demand.

For example, in 1Q20, Chinese demand was some 5% lower at 15 mill tonnes over 1Q19, according to Poten, but apparent demand in April had increased year-on-year based on vessel tracking data, including several US cargoes.

Demand from Northern Asia, Japan, China, South Korea and Taiwan, grew by about 1 mill tonnes in the first quarter or 3% year-on-year. In addition, Indian demand grew by nearly 2 mill during the period (or 37%) as the country looked to take advantage of historically low gas prices, although April’s predicted demand is likely to be lower year-on-year based on vessel tracking data.

Finally, demand from Europe grew by over 4 mill tonnes (or 37%) as gas pricing favoured coal-to-gas switching for power generation and LNG replaced local gas production.

Wood Mackenzie said it expected global LNG demand to grow by 21 mill tonnes or 6% this year, lower than the 26 mill it anticipated earlier in the year prior to the COVID-19 outbreak.

Despite global economic activity having declined significantly from comparable periods last year, the longer-term outlook for LNG demand remained favourable with a growth of 92 mill tonnes estimated over the 2019-2025 timeframe, or compound annual growth of around 4%, Wood Mackenzie said.

Global LNG supply came to about 98 mill tonnes in 1Q20, an increase of 10 mill over 1Q19 (or 11%), primarily due to new US supply - Cameron T1 and T2, Freeport T1, T2 and T3 and Elba Island - according to the analyst.

LNG supply is estimated to grow by 22 mill tonnes this year as the third Cameron train begins operations and recent capacity additions continue to increase production.

Projects slowed

Further ahead, about 97 mill tonnes of new LNG capacity is expected to begin production between 2021-2025. However, Wood Mackenzie forecast the pace of sanctioning new projects will slow significantly this year, due to in particular falling crude oil prices, as a result of oversupply following a collapse in oil demand.

In the LNGC spot market, TFDE headline rates, according to Clarksons, averaged $57,000 per day in 1Q20, a decrease from the averages of $108,000 in 4Q19 and $59,500 in the 1Q19. Spot rates for steam turbine vessels averaged $40,000 per day in the first quarter of this year, a decrease from the average of $78,000 per day in 4Q19 but almost on a par with $39,000 per day recorded in 1Q19.

Slower than expected LNG demand growth and limited opportunities for LNG arbitrage trading between Atlantic and Pacific basins, impacted 1Q20 spot rates.

More recently, Clarksons assessed headline spot rates for TFDE and steam LNGCs at $32,500 per day and $23,000 per day, respectively. The combined impact of the pandemic and normal seasonality may lead to greater volatility in spot rates and to lower utilisation of vessels trading in the spot and short-term markets, in particular steam units.

In addition, there is the limited opportunities for inter-basin arbitrage trading coupled with the likely reduction of average voyage distances, as well as the potentially reduction in global output. LNG trades will be affected in the near-term, particularly in the US, where a number of cargo deferrals and/or cancellations have been reported for this summer.

Newbuilding orders slowed significantly relative to 2018-19, with only a few newbuildings ordered up to the beginning of May. Most were ordered against multi-year contracts, which is an encouraging development for future LNGC supply and demand balance, GasLog said. 

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