Russell: LNG Buyers Should be Wary of Getting What They Want
This raises the possibility that the LNG market will return to deficit early in the next decade, thus handing the whip hand back to producers.
If producers are forced by current weak energy prices to shift away from long-term, oil-linked prices, it would be a fair bet that when the market returns to deficit they will be ruthless in applying their pricing power.
If the market is then based on short-term contracts, buyers could be in for a hard time.
It may be a bit of a reverse example, but LNG buyers may want to look at the experience of BHP Billiton and iron ore.
The world's biggest miner led the charge to move the iron ore market away from annual contacts to virtually spot pricing.
This worked very well for the producer during the recent years of market deficit, but is probably no longer working for it as well given the current supply surplus.
However, unlike the iron ore market, which is likely to be in sustained surplus for many years, LNG's oversupply is likely to be a more temporary state.
(Editing by Richard Pullin)
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