Global LNG markets facing oversupply while key importing regions work on curbing demand

After the energy crisis hit in 2022, many countries took steps to bolster their liquefied natural gas (LNG) supplies along with other fossil fuels and cleaner sources. However, this also spurred a greater shift toward alternative energy options. With this at the forefront, the new wave of LNG supply is set to flood the market amid demand uncertainty, according to the Institute for Energy Economics and Financial Analysis (IEEFA).

IEEFA’s recent ‘Global LNG Outlook’ points out that sluggish LNG demand growth, in combination with a rise in global export capacity through 2028, has the potential to thrust markets into an extended period of oversupply within two years while major importing regions, including Japan, South Korea, and Europe, which together account for more than half of the world’s LNG imports, are targeting cuts in LNG demand through 2030.

While global LNG suppliers and traders are expected to rely on growth in emerging markets to compensate for falling imports elsewhere and absorb a flood of new supply, such rapid LNG demand growth in emerging economies is not guaranteed. In a bid to hammer this point home, IEEFA explains that countries in South and Southeast Asia will face distinct barriers to rising demand, including fiscal and credit challenges, extensive infrastructure delays, and contracting issues, among other obstacles.

Ana Maria Jaller-Makarewicz, Lead Energy Analyst for Europe, commented: “Controlling gas demand is the most effective insurance policy. Geopolitical factors could trigger another energy crisis and expose the LNG market’s volatility and vulnerability to global conflicts. The gas crisis exacerbated by the full-scale invasion of Ukraine brought challenges and opportunities to Europe, where, despite an increase in LNG imports, energy security was ultimately maintained thanks to a historical 20% reduction in gas consumption.”

With LNG projects already under construction anticipated to add 193 million metric tons per annum (mtpa), the global LNG supply capacity is set to reach 666.5 million metric tons per annum by the end of 2028, which represents a 40% increase in just five years despite uncertain demand. The lion’s share of supply additions is forecast to come from the U.S. and Qatar, likely pushing Australia to third place among the top global LNG suppliers.

The LNG outlook shows that Europe’s gas demand is likely to drop by 11% between 2023 and 2030, while LNG imports are predicted to peak in 2025. This is in line with Europe’s natural gas demand falling by 20% since 2021, driven by fuel switching, increased nuclear and renewables generation, and energy efficiency measures.

With LNG imported primarily from the U.S. (46%), Qatar (12.1%), Russia (11.7%), and Algeria (9.5%), the supplies of this fuel accounted for 37% of the continent’s total gas demand in 2023, up from 34% in 2022 and 19% in 2021. IEEFA believes that Europe’s ongoing buildout of LNG infrastructure is likely to lead to “significant excess capacity and could cause utilization rates to fall over the remainder of the decade.”

With national energy and climate plans envisioning steep reductions in the role of LNG, imports to Japan and South Korea fell 8% and 5%, respectively, in 2023, as these countries work on their pivot to nuclear and renewable energy. On the other hand, Taiwan is planning to slash nuclear power, thus, this may result in a boost in LNG demand.

Furthermore, China, which was the world’s largest LNG importer in 2023, may limit its LNG demand growth due to domestic natural gas production and additional pipeline imports along with the rise in renewables capacity, which is constraining the need for LNG in the power sector.

While fiscal challenges along with the inherent volatility of LNG prices may constrain rapid near-term demand growth in South Asia with the role of LNG in power generation likely to remain low, extensive development timelines, contract negotiations, and repeated project delays for LNG-related infrastructure in Southeast Asia may continue to inhibit demand while strengthening political incentives to pursue alternative energy sources.

Clark Williams-Derry, Energy Finance Analyst, underlined: “If rapid and sustained demand growth does not materialize, LNG suppliers and traders—particularly those with higher costs and significant uncontracted supplies—will likely face an extended period of low prices and slim profits.”