The tightening LNG market could lead to higher European forward gas prices as buyers in the region become more dependent on LNG to bridge falling domestic production, analysts at Bank of America Merrill Lynch said in a note published Thursday.
European gas supplies are likely to diminish further in 2012 and 2013, leaving Europe increasingly dependent on LNG to fill the supply gap, despite falling demand.
But with LNG cargoes being diverted to higher-paying markets in Asia, this could eventually translate into higher gas prices on the curve in Europe, Bank of America Merrill Lynch said.
In 2011, UK gas production fell by 10%, although this was partly due to weaker demand and extended maintenance. Bank of America Merrill Lynch, however, noted that gas production has been declining at an average rate of 8% annually over the past five years, adding that it is this trend which will force Europe to turn to LNG.
"So far, pipeline supplies always ended up filling the gap left by LNG diversions. But with domestic gas production falling precipitously, Europe has become more dependent than ever on LNG," said Bank of America Merrill Lynch in the note.
Europe, however, is being "squeezed" out of the LNG market as exporters prefer to send cargoes to higher priced markets in Asia. Qatar, the world's number one exporter, has already started to reduce the number of LNG cargoes it sends into the UK.
LNG imports into the UK fell from an average of 70 million cubic meters/day in June to 50 million cu m/d in December and to the current below 40 million cu m/d.
Bank of America Merrill Lynch warned that UK LNG imports could fall to zero by the end of this year.
"We estimate that UK LNG imports could fall below 25 million cu m/d over the next few months. In fact, it is not inconceivable that the UK will not receive any LNG imports at all by the end of this year," Bank of America Merrill Lynch said.
The increase in diversions could lead to higher onshore gas prices in Europe, with significant upside on winter prices. Bank of America Merrill Lynch estimates Winter 2012/2013 gas prices at the UK NBP could rise above 90 pence/therm on the reduced LNG flows.
JAPAN LNG CONSUMPTION KEY
Japan continues to play a significant role in the direction of global LNG trade and has the potential to change the supply outlook. Japan imported a record 78.4 million mt of LNG in 2011, up 12% from 2010 and imports could rise by another 8.7 million mt this year if only some nuclear capacity is restarted from August.
Bank of America Merrill Lynch predicts that, if none of the capacity was to be restarted, Japanese LNG imports could reach 89.4 million mt in 2012.
