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A Global LNG Crisis

Friday, August 9, 2019

1. LNG prices plunge to 3-year low


- Spot prices of LNG for September delivery in Northeast Asia plunged to just $4.10/MMBtu, the lowest price since April 2016.

- The supply glut has helped drag down prices, while demand has also softened. Reuters reports that at least two cargoes actually sold for less than $4/MMBtu recently. Indian Oil Corp. bought one shipment from Trafigura for $3.69/MMBtu, and CNOOC bought one from Vitol for $3.90/MMBtu.

- The issue is a global one, with natural gas prices in Europe and the U.S. trading at low levels, leaving few areas for producers to find higher prices. Traders are even beginning to look at booking ships for LNG storage, with the plan to offload cargoes in the winter when demand is higher.

- In Japan, average contract prices are double the spot price, and utilities are beginning to grow restless, looking to wiggle out of contract commitments and renegotiate prices. “Given the gas and power markets liberalization and intensifying domestic competition in Japan, it is very important for Japanese utilities to achieve competitive LNG prices so price review negotiations are becoming more intense,” Thanasis Kofinakos, head of gas and LNG consulting, Asia Pacific, at Wood Mackenzie, told Reuters.

2. Energy expenditures per dollar of GDP highest in energy-producing states


- In 2017, every U.S. state saw an increase in total energy expenditures and total energy expenditures as a percentage of GDP. The U.S. spent 5.8 percent of GDP on energy in 2017, up from a record low of 5.6 percent in 2016. The increase was the result of higher energy prices, following the bottoming out of the oil market in 2016.

- But energy-producing states have a much higher share of expenditures as a share of GDP than others, with Louisiana, Mississippi and Wyoming standing out.

- Louisiana tops the list, with expenditures that reach 13.5 percent of GDP. Of that, 50 percent of the spending went to industry. Petrochemicals, in particular, require a lot of energy.

- States with industry tend to spend more on energy, while urban areas spend much less. The District of Columbia spends the least.

3. Manufacturing versus services


- Much of the world has seen a sharp slowdown in manufacturing activity, while the consumer economy has proved to be much more resilient.

- The U.S.-China trade war has cut into manufacturing. The decline of auto sales, industrial activity, freight volumes, new business investment all throw up warning signs of an economic recession.

- Germany released manufacturing PMI data for July this week, and with a reading of 49.5, the release exacerbated fears of recession. A reading below 50 signals contraction.

- China’s PMI data read 49.9, also a slight contraction.

- New tariffs set to take effect in September, and the onset of currency volatility this week could make things worse.

4. Gold surges as currency volatility spikes


- Gold shot above $1,500 per troy ounce on Thursday for the first time since 2013. The price surge came as capital flowed into gold ETFs.

- The weakening of China’s yuan, followed by interest rate cuts from multiple central banks, fed fears of a currency war.

- “Other central banks could follow suit and lower interest rates in their turn, which could lead to a devaluation race between currencies,” Commerzbank said in a note. “If this actually happens, gold is likely to profit.”

- China kept its official rate just shy of 7 to 1 with the U.S. dollar, easing fears that it would use its currency as a weapon. Stocks rose on Thursday in relief.

5. Iron ore prices crater

Iron Ore

- The U.S.-China trade war has decimated iron ore prices, with the most active futures contract having shaved off 25 percent in a week, a worse performance than crude oil.

- Higher U.S. tariffs on Chinese imports could hurt global demand for steel as economic activity slows. “Consequently, Chinese steel manufacturers could scale back their production, which would presumably lead to lower demand for iron ore,” Commerzbank said.

- The investment bank said that China could still implement stimulus measures to offset the impact of tariffs. “Infrastructure measures for example could shore up local steel demand, and by extension steel production,” the bank said.

- Adding to the woes of iron ore prices are the fact that Brazil is ramping up output, which had been disrupted earlier this year.

6. Oil and gas have lower EROCI than renewables


- A landmark report from BNP Paribas finds that crude oil prices will need to fall as low as $10 per barrel in the long run if gasoline is going to be able to compete with renewables and electric vehicles.

- The investment bank says that the energy return on capital invested (EROCI) – or the amount of energy produced for every dollar invested – is much higher for the combination of solar/wind plus electric vehicles. At the wheels, renewables + EVs yield an EROCI that is 6x-7x higher than gasoline-powered vehicles, assuming a Brent price of $60 per barrel.

- That means that in order for gasoline light-duty vehicles to compete in the long run, oil prices would have to trade at about $9-$10 per barrel.

- BNP Paribas says that renewables and EVs would win on “economics alone,” but they also have environmental benefits, zero short-run marginal costs, and an advantage of being easier to transport.

- “We conclude that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors,” BNP Paribas concluded.

7. Cobalt prices collapse


- Mining giant Glencore (LON: GLEN) announced plans to halt production at cobalt mines representing a fifth of total global production. The company says it will idle production at a major copper and cobalt mine in the Democratic Republic of Congo at the end of the year.

- Glencore reported a 90 percent fall in income in the first six months of 2019. Glencore said many cobalt operations are unprofitable at current prices.

- Cobalt prices surged in 2017 and 2018 as EV demand ramped up. Cobalt is a crucial ingredient in batteries. But a wave of new mining supply crashed the market.

- “This should lift sentiment in the global cobalt market,” Daniel Chen, an analyst at CRU Group, told Bloomberg. “Previously, consensus was that cobalt would be very oversupplied for two or even three years ahead, but now the market will pay more attention to risks in the DRC, and risks on the supply side.”

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