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Thursday, October 19, 2017

LNG Could Follow Crude Oil's Lead: Russell

January 18, 2016

In contrast to the carnage in crude oil markets, liquefied natural gas (LNG) prices in Asia have enjoyed relative stability for the past three months, but it's unlikely the calm will persist much longer.

Spot Asian LNG prices <LNG-AS> ended last week at $5.60 per million British thermal units (mmBtu), about 28 percent below the recent peak of $7.80 reached on Nov. 22.

In contrast, Brent crude oil has dropped 46 percent from its recent peak in early October to trade currently around $28.55 a barrel.

The relative outperformance of spot LNG holds over the longer term as well, with the price of the super-chilled fuel having dropped 68 percent since its all-time high of $20.50 per mmBtu in February 2014.

Brent has declined by 75 percent since its 2014 closing peak of $115.06 a barrel, reached on June 19 of that year.

While both markets would appear to suffer from excess supply and less than stellar demand growth, what appears to be happening is that LNG is currently trading with a lag to crude.

The reasons for the decline in oil appear well understood by the market, even if the current drop below $30 a barrel is viewed as unsustainable for an extended period given the amount of global production that will be loss-making.

Oil markets have been oversupplied since the decision by top exporter Saudi Arabia not to balance the market by cutting output, but rather to let low prices eventually drive out higher-cost producers.

The return of at least 500,000 barrels per day of Iranian crude in the short term after the lifting of Western sanctions is also putting a dampener on oil prices.

But the outlook for LNG in 2016 looks just as bad, if not worse, than that for crude.

The oversupply in LNG, particularly in the Asian region, is set to increase dramatically in the next few months as new projects in Australia ramp up.

The 9 million tonnes-a-year Australian Pacific LNG project, co-owned by ConocoPhillips and Origin Energy, shipped its first cargo on Jan. 9, becoming the third coal-seam gas to LNG plant to start operating in Australia's Queensland state in the past year.

On the other side of Australia, Chevron said it's on track to export its first cargo early this year from the 15.6 million tonnes-a-year Gorgon venture, the world's most expensive LNG project with an estimated cost of $54 billion.

And it's not just Australia that's flooding the market with new LNG, shipments from the United States are coming in the next few months as well.

U.S. SHIPMENTS DELAYED, STILL COMING

While the first cargoes from the lower 48 states have been delayed, the point is that by late February or early March it's likely that Cheniere Energy Partners will join the global LNG supply boom with exports from the first train of six planned at its Sabine Pass project.

While Sabine Pass is the only U.S. LNG plant scheduled to start this year, four more are currently under construction.

Australia also has two more conventional LNG projects under construction, which are due to start output later this year, and Royal Dutch Shell's Prelude floating LNG project, which is slated to start operating next year.

In total, the new Australian projects started in the past 12 months and those expected to commence shipments in the next 12 to 18 months will add 61.8 million tonnes of capacity, while plants under construction in the United States could add 72 million tonnes by 2020.

The demand for LNG looks certain to be unable to keep up with the additional supply coming, meaning that prices will likely have to fall to incentivise coal-to-gas switching in top Asian consumers Japan, South Korea and China, as well as in Europe.

Global demand will grow by 23 million tonnes in 2016, according to consultancy Energy Aspects, but only 7.1 million tonnes of this will be in Asia.

If this is the case, it's logical to expect that the flood of Australian LNG will force spot Asian prices lower, as well as displacing Qatari LNG cargoes from the region.

This means more Qatari shipments will likely head to Europe, competing with the nascent cargoes from the U.S. Gulf coast.

Overall, it appears likely that LNG's period of calm relative to oil is poised to end, and spot prices should decline to at least match the plunge in crude, or perhaps even exceed it, especially as the lower-demand shoulder season starts with the end of the northern winter around March.


By Clyde Russell

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