Friday, May 13, 2016
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. Despite plunging LNG prices, industry dictated by long-term contracts
- The LNG industry is going through a bust that rivals the collapse of crude oil prices. LNG spot prices are down three-quarters from a peak two years ago. Part of that is due to the influence of falling oil prices, but also because of surging supply and weak demand.
- Despite that, the industry is still dominated by long-term contracts. Bloomberg notes that less than 15 percent of the long-term contracts in the global LNG industry will expire before 2020. In other words, buyers have locked themselves into higher prices for years to come, making it difficult to benefit from low prices.
- While this may seem like good news for LNG exporters, prices have dropped so low – $4.24/MMBtu for June delivery – that purchasers are getting restless, demanding contract renegotiations.
- Qatar has already acquiesced to renegotiation, agreeing to cut prices in half for Petronet LNG. This has other buyers, notably China’s CNPC, demanding price reductions as well.
- The trend is clear – LNG markets are destined to transform, increasingly relying on spot prices rather than long-term contracts. Also, LNG prices will be set by supply and demand fluctuations rather than basing prices on a link to crude oil. This will be possible because of increasing liquidity in the LNG market (no pun intended).
- But before we get there, there could be a lot of haggling and fighting over the existing long-term contracts.
2. The shrinking of the market contango
- The oil price rally that occurred between February and April saw the market contango shrink. The contango measures the discount between month-ahead contracts and oil deliveries in the future. A contango tends to reflect oversupply in the short run.
- But the contango narrowed as production levels declined, easing concerns about a short-term glut. In early May, the contango stopped shrinking, as the oil price rally stalled, but remained near its narrowest level since last summer.
- The contango probably won’t widen again as global production levels, particularly…