The meltdown in crude oil prices Monday is expected to reverberate through LNG markets as it makes oil-linked LNG cargoes 25-30% cheaper, narrowing the gap between spot LNG prices and long-term LNG contracts.
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Depending on how long the price decline persists, it will alleviate some of the pain faced by LNG buyers in North Asia and other Asian countries that were paying high oil-linked prices even as warm weather, excess volumes and the coronavirus outbreak sent spot LNG prices to record lows below $3/MMBtu.
Roughly 70-75% of the LNG market is still under long-term contracts and exporters like Australia, Qatar and Malaysia, which have a high dependence on oil-linked contracts, will see revenues impacted by lower oil prices.
In Asian trade Monday, the May ICE Brent crude futures was trading around 26% lower at $33.51/b compared to Friday's settle, while the NYMEX April light sweet crude contract fell around 28% to trade at $29.82/b.
"With Brent falling more than 20% and approaching $30/b, this will certainly narrow the gap between term contracts linked to oil and JKM," Jeff Moore, Asia manager at S&P Global Platts Analytics, said.
"However, an important caveat is that these oil-linked contracts are often based on a trailing Brent price averaged over several months. If current prices persist it would imply that JKM is now around 10% of Brent, which is much closer to recent contract slopes," Moore said.
This certainly helps alleviate some of the tension between spot and term contract prices in LNG, but it also helps exemplify that volatility can exist in both markets and the inherent risk of pricing one commodity against another.
LNG BUYING STRATEGIES
The short-term LNG market has been complicated by the coronavirus outbreak that has triggered demand destruction in key growth markets like China, even as low LNG prices could trigger some demand growth among price-sensitive importers like India.
"Two oil sessions cannot help you decide your long-term LNG buying strategy over the longer run. Yes the oil price crash benefits LNG buyers who have oil-priced LNG contracts, but I do not think these price levels are sustainable over a longer period," a major Indian LNG buyer said.
The buyer said that $40-50/b is a more realistic level for oil prices than $30/b in the longer term.
"I would be cautious before tweaking our long-term buying strategy, but yes, it is a good opportunity to hedge. I would wait and watch," the buyer added.
With front-month ICE Brent futures trading at their lowest since February 11, 2016, low prices could also impact negotiations of long-term contracts that are expiring over the next 2-3 years and the signing of new LNG supply as new projects kick off in countries like Philippines, Vietnam and Myanmar.
RIYADH vs MOSCOW vs US SHALE
Whether oil prices remain low will depend on whether Riyadh can bring Moscow back to the negotiating table, and analysts have said $20/b oil is a distinct possibility before a market recovery.
A bigger problem for natural gas markets is that if Russia is truly targeting US shale and fighting for market share in crude oil, it could also mean an impact on US shale gas production and Russian's market share for global gas.
"The impact of this structural shift will of course be felt well beyond the oil market, with likely significant distress for energy exposed sovereigns and sectors. In particular, we do not expect the gas market to be spared," Goldman Sachs said in a report.
"If Russia is indeed responding to both the competition from shale and the US sanctions on its new EU gas pipeline, we would expect its gas exports to Europe to rise as well. Such risks of higher Russian flows just make an already unsustainable balance potentially worse," the bank added.
Goldman Sachs expects oversupply in the European gas market to require a shut-in of US LNG exports, and ultimately a shut-in of Appalachia gas production, a trend that was already visible from the collapse in Chinese demand due to the coronavirus and slower gas demand.
Overall, the bank cut its second and third quarter 2020 JKM price forecasts to $2.40/MMBtu and $2.70/MMBtu respectively from a previous forecast of $4.60/MMBtu.
The dynamic is further complicated by Saudi investments in US shale gas projects such as its 25% stake in Sempra Energy's proposed Port Arthur LNG export project in Texas. Crippling US shale and making US LNG more expensive will benefit Russian LNG projects like Arctic LNG aimed at supplying Asian markets.
"A price war will be painful to all sides and there is no guarantee of the Saudis or Russians winning a long battle," geopolitical consultancy Eurasia Group said, adding that Riyadh has a deep understanding of the elasticity of US shale, which may limit its appetite for a sustained price war.