Asian LNG will be affected by the drop in oil prices in a variety of ways – here we assess the future of the market
As LNG contract prices are typically based on the average of the preceding six to nine months, it will be mid-2015 before suppliers feel the full effects of the low oil price on their cash flow.
Currently, Asian contract prices sit around US$16/mmbtu - relatively high compared to spot which is trading in the region of US$10/mmbtu. This will provide an incentive to buyers to reduce contract supply and increase demand for spot LNG which could drive the price close to the cap set by oil prices.
However, that cap has fallen from US$17-19/mmbtu in Q1 2014 to some US$11/mmbtu and, from mid-2015, spot priced LNG could trade at a significant discount. By this time, contract prices will be lower than our forecast of future oil price levels and demand for spot LNG will consequently reduce.
Whether the drop in oil price will improve buyer appetite for oil indexation over alternative pricing arrangements, including Henry Hub from the US, will depend on whether the oil price shift is perceived as temporary, or a permanent feature of the market. Inevitably a low oil priced environment reduces the relative attractiveness of US LNG.
Yet there are limitations to a simple comparison of delivered price. Some buyers will continue to perceive additional value in the flexibility of US LNG, whereas others will always prefer equity production offered from the more integrated projects outside the US.
In addition, buyers and sellers need to agree mutually acceptable oil indexation terms before deals can be struck. They have been unable to reach a consensus for the last two years and the oil price drop could drive them further apart.
Our existing base case forecast already expects multiple projects not to proceed because of impending oversupply and market competition. The fall in oil prices will likely force some of the less commercially attractive projects to be shelved, enabling companies to shift the blame for project postponements that should have been made 12 to 24 months ago.
For now, we remain comfortable with our expectation that Asian contract pricing will continue to evolve and that lower oil indexed pricing with s-curves will be a feature. We are also confident in our expectations of new LNG volumes coming from the US and elsewhere which will lead to an over-supplied market where all new supply faces challenges on the road to development.
Asian LNG pricing and low oil prices [Subscription required]
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