Thought you had seen the last of the huge price movements in the energy markets? Well, think again.
The supply glut which has led to a 50% slide in oil prices over the past year will begin to grip the other major hydrocarbon product vital to global economies, liquefied natural gas (LNG).
This year will see a “wave” of new LNG production flooding on to international markets as several major projects in Australia finally come on stream after years of development and hundreds of billions of pounds invested.
LNG – natural gas chilled for transportation by giant tankers – has grown in popularity over the past decade through a mixture of higher demand from booming Asian economies and the need to cut carbon emissions.
The US Department of Energy estimates that natural gas burned in power plants produces about half as much carbon dioxide as coal and fewer nitrogen oxides, too.
According to BG Group, supply has remained stalled at levels recorded in 2011. The UK energy company estimates that last year shipments grew by only 1.5% to around 243m tonnes. However, by 2025, the company is forecasting that the LNG supply will reach 400m tonnes, requiring more infrastructure and giant tankers.
This would represent a 5% annual increase in demand over the next decade and almost twice the rate of growth expected to occur in consumption over the same period. Experts are now concerned that the market will be unable to keep pace with supply, leaving some LNG projects redundant.
Andrew Walker, BG Group vice-president of global LNG, said: “After four years of flat supply, we are entering a period of supply growth. 2014 marked the start of a new wave of supply from Australia. This will be joined by the first volumes from the US Gulf of Mexico around the end of 2015.
“This new supply will be absorbed by continued growth in Asian demand, together with the creation of up to six new markets in 2015, further diversifying the LNG trade and opening up new sales opportunities.”
A big issue is the pace of China’s economic slowdown and the knock-on effect this could have across Asia, including big LNG-consuming nations such as South Korea and Japan. Asia’s second-largest economy was forced to shut down 50 nuclear reactors following the Fukushima disaster and many of these facilities will eventually be restarted, suppressing demand for LNG.
Having started last year strongly, the Asian spot market for LNG tanked after it was dragged back by the sharp fall in crude oil, which started to take hold in August. By the third quarter, spot LNG prices in Asia had reached a three-year low and have barely recovered. However, a bigger concern to the overall health of the LNG market will come from the glut of new supply, which will begin to increase this year and reach a peak by 2017 as major projects in Australia come to fruition. Some experts fear the market for LNG could soon become saturated, despite the steady increases in demand being forecast.
Projects reaching their final phase of construction in Australia will add 58m tonnes of LNG supply to the market by 2019. By then, the country is expected to become the world’s biggest exporter of LNG – overtaking Qatar – with 84m tonnes of total capacity.
Worldwide, the figures grow to 122m tonnes of new LNG supply by the end of the decade.
“We expect the LNG market to become more volatile over the next few years as it responds to ‘lumpy’ supply and market-side additions plus exogenous supply and demand factors,” said Mr Walker.
“We see fewer final investment decisions being taken in 2015 than previously expected, which will mean less LNG is available to the market at the end of the decade. This uncertainty brings into sharper focus the attractiveness of flexible supply portfolios which can respond to changing market dynamics,” he added.
Rubber loses bounce
If you have not noticed the cost of new tyres for your car falling then it is time to ask your garage why. Rubber prices traded in Singapore are languishing at six-year lows with no recovery on the horizon as oversupply and weakened demand continue to hit prospects.
The glut in natural rubber is so severe that supplier countries are considering forming a group to regulate the market collectively.
Over the past year, rubber traded in Singapore has lost almost a quarter of its value and is now at around $1.45 per kilo, a huge drop from the 2011 peak of $5.50 at the top of the commodities super cycle.
This spurred a rush by farmers to open up new plantations, which has created the current glut. But output has stagnated at around 12m tonnes because tapping to collect latex sap has been cut back, says the Rubber Study Group.
That has helped reduce the global surplus to just 76,000 tonnes after demand grew by 5% last year to 11.9m tonnes. This is down from average surpluses of 700,000 tonnes over the previous couple of years.
According to commodities broker Commerzbank: “For some upside potential of prices to be realised medium-term, at least the cautiously optimistic hopes for the global economy, according to which global demand in 2015 and 2016 shall be slightly higher than in previous years, would have to prove true.”
Gold’s dollar disconnect
Look no further than gold for signs that the strong US dollar is disengaging from the rest of the world, especially the eurozone.
Gold in dollars recorded its lowest Friday afternoon “Fix” close since April 2010 at $1,152 per ounce. Gold priced in euros edged to its highest Friday finish since January’s 20-month highs amid ongoing concern over the eurozone and the region’s plummeting currency.
“The disconnect between the US dollar and the rest of the world couldn’t be plainer,” said Adrian Ash, head of research at the online broker, BullionVault.