Commodity prices have crashed over the past year, and the market for LNG is no different.

Over the past five years or so, there has been a flurry of construction for LNG export terminals, as natural gas exporters hoped to take advantage of the sky-high prices for LNG in Asia. LNG prices jumped following the Fukushima meltdown in Japan – Japan was by far the world’s largest LNG importer before it was forced to shut down more than fifty nuclear reactors in 2011, and its dependence on imported natural gas spiked immediately after the disaster.

China, despite voracious demand for all sorts of commodities, has not been a huge consumer of natural gas. It uses coal for most of its electricity generation. Nevertheless, due to an effort to clean up its terrible air pollution, China has been central to corporate forecasts for huge annual increases in global LNG demand. As a result, LNG export projects proliferated around the world. Related: A Key Indicator Low Oil Prices Are Lifting Demand

But a funny thing has happened along the way. LNG prices have crashed, with landing prices in Asia dropping from a high of $20 per million Btu (MMBtu) in early 2014 to around $8/MMBtu today. The bonanza for LNG exporters is not playing out due to a variety of factors. First is the collapse in oil prices. LNG prices are still largely linked to the price of crude, so plummeting oil prices have dragged down LNG as well.

However, it isn’t all the fault of oil markets. There are also the underlying fundamentals, which are not favorable to LNG exporters. For example, China’s slowing economy has put a dent in its demand for imported LNG, with imports down 3.5 percent in 2015 compared to a year earlier. That comes after a 10 percent jump in demand in 2014. Other sources of energy are cheaper than gas in China. Even solar and wind are beating natural gas on price in China.

Also, Japan is slowly returning to nuclear power. It brought its first nuclear reactor back online in August. More nuclear power generation will cut down on the need to import LNG. Related:Most Of BP’s $20.8 Billion Deepwater Horizon Fine Is Tax Deductible

Then there is supply. The scramble to build LNG export terminals in recent years is leading to way too much supply. Companies proposed and broke ground on new facilities in the U.S. Gulf of Mexico, Australia, East Africa, Russia, and more. Global liquefaction capacity stood at 301 million tonnes per annum (mtpa) at the end of 2014, according to the International Gas Union. But there was 128 mtpa under construction – meaning global LNG export capacity will jump by more than 40 percent in the next few years. Demand doesn’t appear to be able to keep up, especially with a slowing economy in China, and a likely decline in Japan’s need for LNG imports.

The result could be oversupply. LNG prices are already down by more than half since 2014, but new sources of supply are hitting the market this year, and they are entering into a bear market. Santos started up its Gladstone LNG terminal in Australia in September. Cheniere Energy is bringing its Sabine Pass facility online in the next few months in the Gulf of Mexico, a first for the United States. Spot prices could drop below $6/MMBtu. Related: Oil Fundamentals Improve But Inventories Will Keep Prices Low

Citi Research says that there will be 25 mtpa of oversupply by 2018. That supply overhang will balloon over the next decade if all proposed LNG export terminals actually get constructed. Citi Research says capacity could exceed demand by one-third by 2025. In an Oct. 5 article, The Wall Street Journal cites the Arrow Energy project in Australia, a joint venture between Royal Dutch Shell and PetroChina. The companies had to take a AUS$700 million impairment charge on the project due to a souring “economic environment,” and the project lost AUS$1.5 billion in 2014. The companies are scrapping the terminal.

In fact, Bloomberg reports that the glut of LNG export capacity is creating a “buyers’ market,” giving much more leverage to importers. In Japan, several prominent importers are refusing to sign up to any more long-term contracts, the traditional financial structure that allowed construction of LNG terminal to move forward. Importers want the ability to resell gas, and many are pressuring their suppliers to ease the terms of the contract. Importers signed up to purchase long-term supplies, often at prices much higher than the current spot market. But if buyers no longer want long-term contracts, that would upend the traditional business model.

Many LNG export terminals are still under construction, having been started years ago. But the boom days for LNG suppliers are over for now.

By James Stafford of Oilprice.com

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