Oxford Energy: LNG Trends in the Second Quarter

In June 2019, the Oxford Institute for Energy Studies (Oxford Energy) released its "Quarterly Gas Review" reporting on recent trends in the market. Here are some of the highlights of its report:

Low LNG Spot Prices Force Rethink of Oil Indexing

Since the end of 2018, the LNG market has seen an increase in capacity inflating the global supply leading to weakening in the Asian spot price (Anea) and the European spot price (TTF). In addition to the spot prices, Oxford Energy has seen its measure of "LNG tightness," the spread between US Gulf Coast LNG FOB (AGC) price and the Henry Hub (HH) price, drop. Oxford Energy also saw Asian spot prices fall below Europe prices, "something never before seen" in their data from June 2016 to today. Coupled with high Brent crude oil prices, the trends are forcing buyers to reconsider their contracts chained to the price of oil. Oxford Energy thinks that this could "strengthen the [LNG Japan/Korea Marker (Platts)] index as the LNG index" in the Asian LNG market if oversupply continues.

Weak Prices Slow Investment Decisions

Consistent with Oxford Energy seeing a tight LNG market, no new projects announced a Final Investment Decision (FID), a decision to begin the execution and start construction. There has been nothing regarding "4 mega trains in Qatar" and probably won't be before 2020. Low European spot prices also suggest that North Sea investment could be weaker in the near future. Although even through there hasn't been any FIDs since February 2019, there is likely to be about 60 metric tons per annum (mtpa) announced by the end of 2019. In particular, Oxford Energy thinks that there is "more room for US, Mozambique, and Russian competitors to take FID on their own projects this year."

US Shale Gas Looking for More Demand

Recent moves by Occidental (the acquisition of Anadarko) and Devon Energy continue to support the view that oil companues see "the US as the best growth opportunity in oil," in particular, the opportunity in the Permian basin. With more shale fracking, additional oil and gas supply will be looking for reliable markets to make drilling profitable, and in turn, more pipe infrastructure and LNG liquefaction plants will be necessary. China is an obvious target as the Asian giant is already the biggest spot and short-term buyer of LNG since 2018, but trade tensions threaten to hinder the relationship. China's most recent round of retaliations include a tariff increase from 10 percent to 25 percent on LNG imports. However, with the most capacity under construction, it seems inevitable that US gas will find its way out one way or another.

European Gas Storage Better Value Than Production

Oxford Energy's September 2018 edition included a discussion of how Europe's energy storage capacity could become its strength in the global market. A "workshop" held in Milan in April 2019 looked to outline some of the ways this could be realized. The "workshop" minutes pointed out that Europe's energy economy is moving towards de-carbonization suggesting storage additions would be more beneficial since "storage development is 65 percent cheaper than full production" and, at the right prices,  Europe is a natural end market for producers. There is also the unique opportunity for European storage to add value through arbitrage. In the case that European supply is secure and prices low enough, LNG could be reloaded and shipped to other regions at a profit. Oxford Energy discusses this in more detail in the last section of its report which can be accessed here.


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