Russell: LNG Industry Tension To Rise As Price Breaks Link To Crude Oil

Reuters

LAUNCESTON, Australia, May 26 (Reuters) - The price of spot cargoes of liquefied natural gas (LNG) in Asia has broken its long-standing link to crude oil this year, a development likely to fuel tensions in an already unsettled market.

Spot LNG was assessed at $4.65 per million British thermal units (mmBtu) in the week to May 20, which is 35 percent down from $6.90 at the end of last year, although slightly higher than the low so far this year of $4, reached in mid-April.

In contrast, global benchmark Brent crude pushed above $50 a barrel on Thursday, up around a third from the start of the year.

Although LNG and crude aren't competing fuels there has traditionally been a strong link between them, given that long-term LNG contracts have been linked to oil prices, and this has in the past strongly influenced spot prices as well.

But the de-coupling of crude and spot LNG prices so far this year is likely to have both negative and positive aspects for the industry, but the overall impact is likely to be heightened uncertainty for participants.

Major LNG producers with long-term contracts tied to the crude price are most likely breathing sighs of relief as Brent breaches $50 a barrel and shows signs of having bottomed earlier this year.

But given the ongoing weakness in spot LNG, buyers are likely to seek to maximise purchases of spot cargoes and try and vary the amount they take on long-term contracts.

Put another way, LNG buyers are likely to be annoyed at having to pay higher, oil-linked prices for long-term supplies when they can see considerably cheaper cargoes available on a spot basis.

This dichotomy is likely to up buyer pressure on producers to amend or renegotiate long-term contracts to make them reflect the realities of the natural gas and LNG markets, rather than the oil market.

However, producers will have little incentive to end oil-linked contracts, as this would cut their revenues substantially and expose them further to the glut of LNG that is expected to persist for several years to come.

The oversupply of LNG may actually worsen in coming years as more U.S. projects ramp up and the last of the eight major Australian ventures come to full production.

This means buyers increasingly hold the upper hand, making it more likely that producers will have to accept lower prices in order to grow demand.

Demand Growth Insufficient

Demand is emerging as an issue for LNG, with top buyers such as Japan and South Korea experiencing declining demand, with increased purchases by China and India compensating, but not quickly enough to offset rising supply.

Japan, the No.1 LNG buyer, is a market most likely in structural decline for LNG, with imports falling 3.3 percent in April from a year earlier to 6.38 million tonnes, taking the drop for the first four months of the year to 5.5 percent.


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