MILAN: Asian liquefied natural gas prices, already at four-year lows, face further steep losses in the first half of 2015 as the full force of a weak crude market works through into gas contracts and new supply comes on stream.

Global gas prices are seeing their biggest drop on record as slowing Asian demand, new supply from mega-projects and a streak of abnormally mild temperatures worldwide mark the end of a five-year bull run.

Asian gas should attract European buyers as its price premium disappears.

But falling long-term oil-linked LNG contract prices are set to keep squeezing spot prices lower to keep them competitive, while moves by Asian utilities to substitute LNG for cheaper crude oil further saps gas demand.

“I don’t see a bottom to prices,” a European trading house source said, noting that being long gas had become a recipe for losing money.

Six new liquefaction plants totalling 39 million tonnes of export capacity in Australia, the United States and Indonesia will expand global supply by 10 percent this year, tilting the market into a period of excess production capacity until 2023, Bernstein Research said last week.

A 60 percent plunge in Asian spot LNG since February to about $8 per million British thermal units (mmBtu) currently has burnt trading firms from London to Singapore and slashed producer profits.

Prices for April delivery are currently estimated at $7.20 per mmBtu, with renewed Australian supply offerings from April pushing them towards the $6 per mmBtu range, three traders said.

“It won’t be long before we’re trading at those levels, and maybe even below,” a trading manager at an Asia-Pacific producer said.

Analysts believe spot prices will fall further once the full brunt of oil price drops is passed through into long-term, oil-indexed LNG contracts in three to six months.

Twenty-year supply contracts have a built in a lag to oil prices to protect buyers and sellers from sudden changes.

By late summer long-term contract prices could touch lows of $6.50 per mmBtu, says a new report “The Tide Has Turned for the Global LNG Market” by Anne Katrin Brevik, head LNG analyst at Thomson Reuters Point Carbon.

That will likely impose a fresh low ceiling on spot prices for them to stay competitive.

Brent crude is currently trading close to six-year-lows at just over $49 a barrel, though prices turned positive on Monday after the OPEC Secretary-General said he expected the market to bottom out around current levels.

Published in Dawn January 27th, 2015

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