LNG is the new shale oil with the US as disruptor-in-chief

An LNG tanker passes boats along the coast of Singapore. Much has been written about how the expected glut in LNG supply is unlikely to materialize, given the rapid growth of demand for the super-chilled fuel in Asia. (Reuters)
Updated 14 March 2018
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LNG is the new shale oil with the US as disruptor-in-chief

LAUNCESTON, Australia: Crude oil is likely to spring to mind if one is asked to name a commodity where the US is disrupting the market by becoming a swing producer and challenging traditional trade flows, especially in fast-growing Asian markets.
But it is increasingly likely that the US is about to play the same role in liquefied natural gas (LNG), as it ramps up production in an already well-supplied market.
Much has been written about how the expected glut in LNG supply is unlikely to materialize, given the rapid growth of demand for the super-chilled fuel in Asia, especially in China, which is now second only to Japan as an importer.
Major producer Royal Dutch Shell warned last month of an impending supply gap that will need more than $200 billion of investment by 2030 as the natural gas market grows faster than that for any other source of energy.
There is nothing wrong with Shell’s bullish forecast, and there is renewed interest around the world in developing LNG projects to meet forecast demand.
Investment in LNG projects fell off a cliff in recent years as the industry dealt with the ramifications of rapid supply growth, which has seen Australia add eight new large-scale plants, while the US is busy commissioning the second of its new export projects, with five more to come by 2019.
While Shell and others may be correct about the need for new plants, it is the next couple of years that could prove challenging for the LNG industry. Most of the new capacity built in Australia was done under the old industry model where long-term offtake contracts, often linked to crude oil prices, allowed for the financing of billions of dollars of investment with extended payback terms.
The model has been different in the US, with far less of the upcoming production committed to buyers, meaning more will be sold at spot prices linked to US benchmark Henry Hub natural gas.
This is where the role of the US in LNG starts to look eerily similar to the role its shale oil producers are playing in crude oil markets.
Traditional exporters, such as Saudi Arabia and Russia, have found it tougher than expected to push crude oil prices higher, mainly because customers, especially in Asia, have been able to turn to alternative suppliers.
OPEC and its allies, including Russia, have had success in draining excess global crude inventories, but it has come at the expense of market share in Asia. In 2017, for example, Saudi Arabia’s share of China’s imports was 12.4 percent, a drop from 13.4 percent the year before. The share enjoyed by the US rose from 0.13 percent to 1.84 percent. While the US is far from a major threat to Saudi Arabia in Asia, when you add gains by other smaller exporters not part of the OPEC and allies output-cutting deal, it starts to add up.
Just as shale roiled crude oil markets, it is likely that US shale gas will have the same effect, at least until demand growth eliminates the coming supply surplus.
The US will add about 50 million tons of annual capacity by 2020. Overall, the LNG market is going to have to adapt to the arrival of US production, but where liquefied gas differs from crude oil is in not having an established producer group that can coordinate a response.


OPEC oil ministers gather to discuss production increase

Updated 19 June 2018
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OPEC oil ministers gather to discuss production increase

  • Analysts expect the group to discuss an increase in production of about 1 million barrels a day
  • The officials were arriving in Vienna ahead of the official meeting Friday

VIENNA: The oil ministers of the OPEC cartel were gathering Tuesday to discuss this week whether to increase production of crude and help limit a rise in global energy prices.
The officials were arriving in Vienna ahead of the official meeting Friday, when they will also confer with Russia, a non-OPEC country that since late 2016 has cooperated with the cartel to limit production.
Analysts expect the group to discuss an increase in production of about 1 million barrels a day, ending the output cut agreed on in 2016.
The cut has since then pushed up the price of crude oil by about 50 percent. The US benchmark in May hit its highest level in three and half years, at $72.35 a barrel.
Upon arriving, the energy minister of the United Arab Emirates, Suhail Al Mazrouei, said: “It’s going to be hopefully a good meeting. We look forward to having this gathering with OPEC and non-OPEC.”
The 14 countries in the Organization of the Petroleum Exporting Countries make more money with higher prices, but are mindful of the fact that more expensive crude can encourage a shift to renewable resources and hurt demand.
“Consumers as well as businesses will be hoping that this week’s OPEC meeting succeeds in keeping a lid on prices, and in so doing calling a halt to a period which has seen a steady rise in fuel costs,” said Michael Hewson, chief market analyst at CMC Markets UK
The rise in the cost of oil has been a key factor in driving up consumer price inflation in major economies like the US and Europe in recent months.
Already US President Donald Trump has called on OPEC to cut production, tweeting in April and again this month that “OPEC is at it again” by allowing oil prices to rise.
Within OPEC, an increase in output will not affect all countries equally. While Saudi Arabia, the cartel’s biggest producer, is seen to be open to a rise in production, other countries cannot afford to do so. Those include Iran and Venezuela, whose industries are stymied either by international sanctions or domestic turmoil. Iran is a fierce regional rival to Saudi Arabia, meaning the OPEC deal could also influence the geopolitics in the Middle East.