Liquefied Natural Gas Demand - Supply Forecasts & Market Analysis

Question: Discuss about the Demand and Supply Analysis of Liquefied Natural Gas. Answer: Introduction: The relation between demand and supply of a product is one of the crucial economic fundamentals to determine the price of commodities in a given marketplace. In order to identify the factors affecting the demand and supply sides, first of all, the terms demand and supply must be classified to get an explicit knowledge. Meanwhile, the term demand implies the original quantity required for the identified target demographic profile in a market. Conversely, the supply of a product signifies the amount or quantity of a significant market product offered to the target demographics (Hochwald, Davidson and Smolensky, 2015). However, the critical factors affecting demand and supply of a product can significantly contribute to the product pricing. The article selected for this particular essay paper shows the impact of the oversupply of Liquefied Natural Gas (LNG) in the Australian market. According to the fundamental theory of demand and supply, supply glut of a product can create an adverse impact on the pricing if demand will be constant. The current production surge of LNG has caused the oversupply of LNG in the global market. As a result of the scenario, the target spot market prices have been slumped considerably delaying latest projects (Macdonald-Smith, 2016). The current market scenario has forced the largest LNG producers in Australia to cut production. The most recent global trend of LNG has been negative for the producers. Though the oversupply situation is negative for the leading LNG producers, such oversupply situations have been considered as investing opportunities for the global investors in the emerging markets (Grafton and Lambie, 2014). Due to oversupply, cheap LNG prices have opened up earnings scopes as long-term contracts are remaining strong. According to a detailed global report of LNG market, the supply of LNG will hit the highest point at 28 million tonnes a year by 2019 that will be 11% higher than the current production (Macdonald-Smith, 2016). As a result of the consequences, spot prices of LNG will remain sluggish. Furthermore, the low-demand season will add fresh worries for the LNG producers as the future contract prices will decline in an automatic way (Tagliafico, Valsuani and Tagliafico, 2011). Analysing the production and consumption of Liquid Natural Gas in Australia, it can be seen that the production of LNG is much higher than the consumption in the country. It makes the country a net exporter of LNG in the global market (Ravindra and Iyer, 2014). Furthermore, an excess supply in the world market, the demand for Australian LNG falls that leads to fall in the price of LNG. A figure has been presented below for better understanding. Figure: Production and consumption of liquid natural gas Source: (Macdonald-Smith, 2016) Due to demand worries and oversupply situation of global LNG market, the prices of LNG may see fresh lows in the next five years. Moreover, the production surplus has added latest issues in the LNG industry. Meanwhile, new projects and long-term contracts of LNG have been two likely settlements that can hinder the decline of the price (Agerton, 2016). In the essay paper, a detailed discussion of demand, supply and price of LNG in the Australian market has been identified to show how the market will deal with the oversupply issue in the upcoming future (Vatani, Mehrpooya and Palizdar, 2014). Hence, it is important to understand the demand and supply factor that influence the price of LNG in the Australian market. It has been estimated that the excess supply of LNG in Australia and global market is the major factoring contributing to the fall in the price of LNG products. Furthermore, the revolution of the USAs Oil and Gas industry contributed to oversupply of LNG in the global market (Lee, 2008). Hence, it can be seen that excess supply has led to the fall in the price and will further reduce the price in the coming years. A diagram has been presented for better understanding. Figure: Oversupply and Price of LNG Source: (Macdonald-Smith, 2016) It can be seen through the above diagram that at price P2 the demand is at Q1 and the supply is at Q2. Hence, there is a need to reduce to the price to reach an equilibrium point of P1, where the demand will be equal to the quantity supplied (Macdonald-Smith, 2016). Therefore, it can be seen that the quantity supplied in Australia has been reduced to Q3 to match with the quantity demanded. The meet the equilibrium point, the price of LNG has been reduced in the country (Lewis, 2015). Hence, the excess supply can be seen as a major factor for the fall in the price of LNG in Australia. Now, it can be seen that a decline in quantity demanded has been evident in the global market due to oversupply of Liquid Natural Gas by various OECD nations. Along with that, the new projects and contracts have made the country export LNG at low prices to be safe from financial losses. A further decline in the demand can be seen due to innovative energy resources such as electric vehicles and machineries. Hence, it can be seen that the fall in the quantity demanded is another primary reason for the fall of the price of LNG. A diagram has been presented below for better understanding. Figure: Decrease in Demand of LNG Source: (Macdonald-Smith, 2016) It can be seen through the above diagram that the demand for the LNG products falls in the international market due to excess supply that shifts the demand curve from D to D2. It results in the fall of the price from P to P2. Hence, it can be seen that falling demand of LNG is another factor that has led to the fall in the price (Agerton, 2016). The oversupply situation of global LNG market has been a considerable long-run negative factor for the LNG producers in the Australian market. Cheap LNG may be sufficient for the common public of the country, but the low-demand in the industrial sector may create pressure on the pricing. However, the oversupply and weak demand of LNG can reduce the target prices of the industrial energy companies creating investment opportunities. Understandably, demand and supply of LNG in the global market have affected the LNG spot prices to decline in the Australian market at the same point in time. Conclusively, LNG glut in the Australian market has triggered the weak LNG prices, to say the least. References Agerton, M. (2016). Global LNG Pricing Terms and Revisions: An Empirical Analysis.EJ, 38(1). Grafton, R. and Lambie, N. (2014). 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