IEA cuts gas demand outlook again as glut seen to end of decade

By Anna Shiryaevskaya on 6/8/2016

PARIS (Bloomberg) -- While oil markets will start re-balancing after a slump next year, an oversupply in natural gas won’t disappear until the end of the decade, the International Energy Agency said, slashing its gas demand outlook for a fourth straight year.

Global consumption will expand by 1.5% annually from 2015 through 2021, down from last year’s forecast of 2% growth from 2014 through 2020 and a 2.5 gain over the prior six years, the Paris-based agency said Wednesday in its Medium-Term Gas Market Report. The slowdown will be driven by weaker use in the U.S. and Japan as the fuel struggles to compete against booming renewables and “very cheap” coal in power generation.

“Slower generation growth, rock-bottom coal prices and robust deployment of renewables constrain gas’s ability to grow faster in today’s low-price environment,” the IEA said.

Global gas markets will remain oversupplied until 2018 and demand and supply won’t align until 2021 as LNG capacity jumps 45% through 2021, 90% of which is in the U.S. and Australia. Markets will struggle to absorb the increase amid the return of Japanese reactors, cheap coal and competitive Russian pipeline fuel in Europe. The IEA in February said an oil glut that damped prices will end in 2017.

U.S. gas fell 71% from a peak in 2008 to average $2.61 a million British thermal units on the Henry Hub in 2015, while UK prices on the National Balancing Point dropped 39% in the period to $6.53/MMBtu, according to the IEA. Meanwhile, benchmark coal in the U.S. fell 54% to $1.97/MMBtu and 62% to $2.34 in northwest Europe.

World gas demand will be 3.9 Tcm (140 Tcf) in 2021, compared with 3.6 Tcm in 2015, the IEA said. Global supply will also rise 1.5% annually, slowing from the prior period as low prices and demand deter investments.

Consumption in Europe will rise 0.3% annually, ending years of declines, amid support for gas in power. While the region is seen as a market of last resort for excess LNG, its potential is limited by competitive Russian pipeline supplies.

U.S. demand growth will slow as the government supports solar and wind generation and the use of gas in electricity stagnates through 2021 after a 20% surge in 2015.

Gas use in developed Asian nations will fall 0.2% a year as “modest growth” in South Korea and increased use in Australia offset some of the 11% decline in Japan over the six-year period.

China will be a key driver of demand, with 9.1% annual growth following a 4% increase in 2015, the slowest pace in more than 15 years. If Chinese consumption stalls, the global oversupply will extend “well into the 2020s” as markets in Latin America, Africa and the Middle East only offer “pockets of demand,” the IEA said.

“It is therefore clear that the trajectory of global gas markets—and how fast they rebalance—will depend on the scale of expansion in China and the rest of developing Asia,” the IEA said.

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