In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. China’s appetite for LNG not as big as expected
- Japan is by far the largest importer of LNG in the world, but there isn’t big potential for growth. LNG exporters are betting overwhelmingly on China.
- China’s economy is slowing, and so is its demand for imported LNG. It will only accept 77 percent of the cargoes it contracted for in 2015. It will resell the rest, adding further supply on the spot market.
- With an onslaught of new LNG capacity expected – major projects are coming online in the U.S. and Australia (more on that below) – LNG spot prices could remain depressed for the next few years. Worldwide LNG supply is expected to grow by the equivalent of 38 percent of 2014 demand over the next three years.
- Spot prices for JKM – the Asian benchmark – are down from ~$20/MMBtu in early 2014 to less than $7.50/MMBtu for January delivery.
2. LNG export capacity set to explode in Australia and U.S.
- A flood of LNG export projects began construction a few years ago as JKM prices skyrocketed.
- Prices are already low on slower Chinese demand and rising supply, but several major projects, particularly…
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. China’s appetite for LNG not as big as expected
- Japan is by far the largest importer of LNG in the world, but there isn’t big potential for growth. LNG exporters are betting overwhelmingly on China.
- China’s economy is slowing, and so is its demand for imported LNG. It will only accept 77 percent of the cargoes it contracted for in 2015. It will resell the rest, adding further supply on the spot market.
- With an onslaught of new LNG capacity expected – major projects are coming online in the U.S. and Australia (more on that below) – LNG spot prices could remain depressed for the next few years. Worldwide LNG supply is expected to grow by the equivalent of 38 percent of 2014 demand over the next three years.
- Spot prices for JKM – the Asian benchmark – are down from ~$20/MMBtu in early 2014 to less than $7.50/MMBtu for January delivery.
2. LNG export capacity set to explode in Australia and U.S.
- A flood of LNG export projects began construction a few years ago as JKM prices skyrocketed.
- Prices are already low on slower Chinese demand and rising supply, but several major projects, particularly in Australia and the U.S., will cause LNG export capacity to rise quickly through 2018.
- Australia will become the single largest LNG exporter by the end of the decade.
- Several major players involved in Australian LNG include Chevron (NYSE: CVX), Santos (ASX: STO), Woodside Petroleum (ASX: WPL), ConocoPhillips (NYSE: COP), Total (NYSE: TOT), BG Group (LON: BG) and Shell (NYSE: RDS.A), the latter two of which will soon be merged.
3. Rising LNG capacity changing markets
- Greater LNG capacity is transforming a market that used to depend mostly on long-term fixed contracts.
- More supply means more reselling and more diversity. That is making LNG markets more liquid, and spot sales and short-term sales are rising.
- That will increasingly, although perhaps gradually, erode the practice of long-term contracting. In turn, that could undermine the practice of linking LNG prices to crude oil prices.
- Natural gas will continue to grow its share of the total energy pie, but LNG markets will go through a rough patch for the next five-plus years.
4. Bearish Bets on Oil
- The chart above depicts the long/short speculative positions by oil traders.
- Traders tend to skew towards a net-long position on crude, assuming oil prices will rise over time.
- However, several times this year, net-short positions reached multiyear highs: Once during the downturn in January through March, a second time when prices fell again in late summer, and now a third time as WTI dropped towards $40 per barrel in November.
- The moves highlight a pessimism among oil speculators about the near-term trajectory of oil prices. The more short positions are taken up, the more downward pressure on oil prices.
- On the other hand, there is a whip lash effect to be aware of. As net-short positions build up, the likelihood that traders will close out positions to pocket cash grows, raising the prospect of strong, one-day gains in crude oil prices. In other words, more short positions raise the chance of an upward correction.
- The short-term day-to-day fluctuations highlight the influence of speculators on the markets – while fundamentals may not change much from one day to the next, the positions from traders can lead to volatility.
5. CO2 emissions falling in U.S. on per capita basis
- There are two charts above: the first shows CO2 emissions have declined over the past decade on a per-capita basis. 48 states plus the District of Columbia achieved a per capita emissions reduction.
- The second chart shows that on an absolute basis, over half of U.S. emissions come from 10 states. Texas (641 million metric tons of CO2) leads the pack. California comes in second, but most of that is attributed to its massive economy (eight largest GDP in the world). California is the fourth-lowest emitter on a per capita basis.
- The decline in CO2 emissions over the past decade come largely from the switch from coal to natural gas in the power generation sector (a trend that stems from cheap shale gas and tightening EPA regulations), plus more renewable energy and energy efficiency.
- The other source of carbon reductions comes from greater fuel efficiency in the nation’s auto fleet. Light-duty vehicles have gained an average of 5 miles per gallon in fuel efficiency between 2004 and 2013.
6. Russia’s currency battered by oil prices and sanctions
- Russia’s currency traded roughly at 30 rubles to the USD between 2011 and 2014, a period in which oil prices traded near triple digits.
- The onset of the Ukraine crisis, the subsequent annexation of Crimea, and western sanctions started to take a toll on the Russian economy. The ruble began depreciating in early 2014.
- Russia weathered the first half the year relatively well, despite the efforts by the U.S. and EU to isolate the economy.
- The ruble began spiraling out of control as oil prices collapsed, with two very volatile periods – in the few months following OPEC’s infamous November 2014 decision to leave its oil production quota intact. Then a second decline took place in late summer when the Chinese stock market suffered a brief meltdown and oil prices fell once again.
- Only after the central bank choked the economy with a hike of interest rates to 17 percent did the ruble stop falling.
- The ruble remains near the multiyear lows exhibited earlier this year. GDP is expected to shrink by 3.2 percent in 2015.
- The latest downing of a Russian jet by Turkey threatens to once again escalate tension between Russia and its neighbors.
7. High yield energy debt has not paid off
- Hedge funds that focus on high-yield debt are seeing the worst losses in seven years.
- The collapse of crude prices brought out a lot of investors looking to scoop up cheap distressed debt.
- But the global bust in commodity prices have crushed the value of distressed debt, and as institutional investors sought out safe havens, high-yield debt lost more value.
- Distressed hedge funds lost 5 percent so far this year, the worst performance since the global financial crisis in 2008.
- Energy companies account for some of the worst performing debt. Energy companies in the distressed debt index lost more than 43 percent (see chart).
- The huge bet by hedge funds on distressed debt has been a loser, but could eventually pay off. The value of the debt could rebound if oil prices rise, but having been burned, some investors are growing wary of such a strategy.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.
