LNG tightening New
IT SOUNDS like a football term, but “shifting the inflection point”, is an expression that will soon be popular in the oil and gas industry as fear of an LNG surplus morphs into worry about a shortage faster than anyone could have possibly imagined at this time last year. The change in sentiment, which could trigger a revival in plans for new LNG projects, can be traced to two significant events: strong Chinese demand for gas as a replacement for coal in its power sector and the price of Brent-quality crude oil bumping against the US$70 a barrel barrier. For an industry that has adjusted its cost structure in order to live with forecasts of an oil price at $50/bbl (and less) the extra $20/bbl is a welcome development, reflecting producer discipline among big oil exporting countries and strong-than-expected global economic growth.
The LNG change is an even bigger surprise than the return of oil to $70/bbl because until a few months ago there was a widely-accepted view that too many LNG projects had been developed and the market would be stuck in near-glut conditions for years. Investment bank analysts who follow the oil patch have spotted the change, with some noting a rush by clients to increase their exposure to the sector, others asking where the new projects are, and a few asking how close demand for LNG is to overtaking supply. Deutsche Bank was one of the first to suggest that the inflection point from an LNG glut to shortage is shifting, and at a pace which no-one expected, with the changeover occurring this year, rather than in another six years. After noting the effect of strong Chinese demand for LNG as part of that country's environmental clean-up, analysts at Deutsche Bank said the spot (short-term) price of LNG had risen to around $11 per million British thermal units. That eye-catching price for uncontracted cargoes compared with a low of $4/MMbtu in 2016 and an average of $8/MMbtu last year.
Demand for LNG in the Pacific Basin, Deutsche Bank said in a January 10 analysis of the Australian oil and gas sector, had risen by 14% in the 12-months to October, driven partly by seasonal factors (stocking for the northern winter) but also because of a long-term trend. "However, we believe this also reflects wider structural changes emerging in the region, particularly China," Deutsche Bank said. "We believe this could see 2018 as a transition year for LNG, moving from a buyer's market to a seller's market, potentially bringing forward the commonly accepted 2023/24 inflection point where demand overtakes supply." Deutsche Bank is not alone in seeing a sharp improvement in the LNG supply/demand relationship. Bernstein Research reckons that LNG demand growth was running at an annualised 11% last year, the strongest in six years, leading to a conclusion that global consumption will almost double by the year 2030.
Significantly, Bernstein described the recently popular view that the LNG market was oversupplied as a misconception. Macquarie Bank, in a more investment focused assessment of the oil and gas market, described the situation as "risk on", banker speak for it being a time of rising prices and strong demand as investors re-assess the sector and like what they see. "We see the sector rallying hard off strong oil and LNG prices, and believe investors are now willing to pay for what they have avoided since prices crashed in 2016, risk," Macquarie said. "With oil rising we see the cycle starting to turn, and companies looking to activate growth options." Credit Suisse, another investment bank, agreed with the proposition that the oil market has turned for the better, but also asked a difficult question, albeit in a light-hearted way: "Dude, where are my new projects?" The point of that question can be found in the way the boom years, when the oil price routinely traded above $100/bbl and new projects were plentiful, gave way to a period when new project development dried up. "Having been on a mega-project sanctioning spree from 2007 to 2011, the past six years have seen a drought of organic (new project) sanctions," Credit Suisse said. "With the clock ticking, and merger and acquisition activity aside, the coming years will need to see economically justified project sanctions to justify current (oil company) valuations." In other words, Credit Suisse is concerned that the recent increase in oil and gas company share prices implies a big increase in future production (and profits) from new projects. "Can and will they build?" Credit Suisse asked, or "will they shrink to greatness or ignominy, or will they buy their next project?" Decoded, the questions being asked by Credit Suisse are all about whether Australia's oil and gas sector is ready for improved market conditions, and whether there are many development-ready projects to take advantage of the improving outlook. Good questions. Answers expected soon (hopefully).
15th Jan Energy News paywalled
BUL Price at posting:
16.0¢ Sentiment: Buy Disclosure: Held
