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Fossil Fuel - Jan 26, 2018

The Outlook for LNG and Oil Products in 2018

Part Two

With cold weather spreading over the northern hemisphere, natural gas and LNG prices will be starting 2018 in a healthy environment. In Europe and the US, natural gas prices have been gaining recently in response to the cold weather demand. In northeast Asia, which does not have the luxury of extensive gas pipelines, LNG prices have been marching up as well. Natural gas/LNG demand should see another year of strong growth – especially with India and China ramping up infrastructure – which bodes well for prices in 2018.

2018 will be the year that the existing hierarchy of major LNG buyers see a reshuffling for the first time in more than a decade. China will overtake South Korea to be the second-largest LNG importer in the world. Chinese demand has been growing strongly in recent years – 2017 imports are expected to have increased by over 50% to 38 million tons – and there is still a lot of room to grow. South Korea, with some 37 million tons, falls to third place, but China still has a ways to go to catch up to Japan and its demand of some 83.5 million tons. That, however, is fundamentally changing the way the LNG business operates in Asia. Unlike Japan and South Korea, Chinese buyers are more reliant on short-term purchases, rather than long-term contracts. This will makes the Asian spot market, and the burgeoning trading hub in Singapore, more important. Asian spot LNG prices ended 2018 at some US$11/mmBtu – their highest level since November 2014 – and should grow even more as the winter season unfolds. China’s level of growth is necessary to erode the current and project LNG supply glut; but will also necessitate a change in how major LNG exporters – Qatar, Australia, Malaysia and now the US and Canada – do business in Asia. 

On the oil product side, it will be a year of more additions in Asia as key markets aim for energy security. China has added nearly 500 kb/d of new refining capacity over the second half of 2017, and there is more to come. Vietnam’s long-delayed Nghi Son refinery will start up in mid-2018 and even Indonesia has made progress on its planned new Tuban refinery with Rosneft. With China recently issuing its 2018 crude import quotas – with increases for key teapot refineries - more and more oil products will be swirling around Asia, placing even more pressure on aging refineries in Europe, which are vulnerable to closure from a combination of tightening fuel standards and a shrinking of export options. With crude prices on the rise – WTI exceeded US$60/b for the first time since mid-2015 – refining margins are healthy; but the upcoming IMO regulations will be pushing refiners to invest heavily in upgrading capacity as fuel oil’s role in bunkering diminishes.

Key figures for 2018

Asian LNG spot price range: US$11-13 mmBtuProjected China LNG demand 2018: 48 million tonsChina crude import quotas 2018: 121.32 million tons (2.8 mmb/d)Estimated Asian refinery capacity additions 2018: +600 kb/dEstimated Asian refinery capacity additions 2019: +900 kb/d (including Malaysia’s RAPID and Brunei’s Hengyi refinery)


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