Russell: LNG Buyers Should be Wary of Getting What They Want

However, if oil prices do recover strongly, then the push to short-term contracts linked to other global gas benchmarks such as the UK's National Balancing Point or the U.S. Henry Hub will make more sense.

It's virtually impossible to accurately predict where oil prices will go. All that an analyst can reasonably do is assess current trends and make forecasts based on these trends continuing.

Currently this means that oil prices will likely remain below $100 a barrel for an extended period, especially if major swing producer Saudi Arabia continues its policy of not surrendering market share in order to boost prices for the benefit of rival producers.

Even if U.S. shale oil and other higher-cost crude such as Canadian tar sands and deep offshore wells are forced from the market, they will come back as soon as prices recover.

Given the uncertainty of where oil prices will go in the next few years, the temptation for LNG buyers will be to stick to their current campaign of trying to end, or reduce, oil-linked prices.

They will also be seeking to use more short-term contracts, end restrictions such as destination clauses and encourage price flexibility.

Short-Term Gain, Longer-Term Pain?

This is all good when the market is in surplus, which is now the case given the increasing LNG supply as projects in Australia and elsewhere start to come online.


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