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James Stafford

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This Week In Energy: LNG Could Be 2015’s Big Winner

This Week In Energy: LNG Could Be 2015’s Big Winner

The major news out of Washington this week was the address to a joint session of Congress by Israeli Prime Minister Benjamin Netanyahu. The speech became extraordinarily divisive and controversial, both because it took place so close to an election in Israel, and because the invitation to Netanyahu was given behind the back of the White House. Furthermore, Netanyahu’s harsh remarks regarding the Obama administration’s ongoing negotiations with Iran over its nuclear program were met with pushback from America’s executive branch. Netanyahu called the emerging accord between the U.S. and Iran a “bad deal,” while the White House said Netanyahu offered “nothing new.” Netanyahu may have hardened Republicans against a compromise with Iran while the chances that sanctions could remain in place may have increased. On the other hand, both Secretary of State John Kerry and Iranian negotiators dismissed Netanyahu’s speech, and reiterated the progress they have made in hammering out a deal. An end of March deadline is quickly approaching, and perhaps as much as 1 million barrels per day of Iranian crude hang in the balance.

The other major piece of news out of Washington this week was the U.S. Senate’s failed attempt at overriding President Obama’s veto of legislation approving the Keystone XL pipeline. Coming up a few votes short, Congress has nearly exhausted all of its options, and the ball remains in the White House’s court to ultimately decide the fate of the much-maligned project. While several Republican legislators vowed to try to find a legislative vehicle in which they can insert language approving the pipeline, Washington will likely put the issue on hold for now and merely wait for final word from the President.

On the other side of the world the National People’s Congress got underway in Beijing; one of the most important annual political functions in China. The Chinese government lowered its growth target for 2015 down to 7%, significantly lower than last year’s rate of about 7.4%, which in turn, was the slowest rate of growth in 25 years. Li Keqiang, China’s Premier, acknowledged that China’s growth is slowing, but also signaled that the government is willing to accept this “medium-high-level growth rate.” The more modest economic performance is showing up in the commodity markets. There is some evidence that China could be reaching “peak coal,” a monumental milestone if current trends continue. China actually saw its coal consumption drop just a bit in 2014, evidence that the country could move to a cleaner future quicker than expected. That has led to a decline in coal prices, forcing mining companies around the world to cut back on production and shut in mines. Lower demand for oil will also keep prices from rebounding too quickly.

Urgent Note. We urge you to take a look at this week’s Inside Investor, in which Dan Dicker examines at two supposedly incompatible trends facing the oil markets. On the one hand, big money is still pouring into the energy sector as investors feel a rebound coming. However, there are good reasons to suggest that not only is a rally a long way off, but another downturn is very possible. Find out more by clicking here.

Nevertheless, it is not as if the Middle Kingdom’s appetite for commodities is quenched. China announced plans to stock up on all sorts of commodities this year, seizing the opportunities in the current low-price environment. Oil, iron ore, copper, corn, wheat, soybeans and more are likely to be on the menu. China also has plans to build up a 90-day supply of oil in a strategic petroleum reserve, and it has ramped up its purchasing efforts over the last year. If China gobbles up oil at a faster rate in 2015, it could provide some support to oil prices.

Libya has been in the news over the last few weeks, and not for positive reasons. The OPEC-member is seeing its institutions crumble amid civil war, and the bad news keeps on coming. This week Libya declared a force majeure on contracts related to 11 oil fields due to attacks on infrastructure from the Islamic State. Estimates are shaky, but oil officials say the country is pumping around 500,000 barrels per day (bpd). That is not only down from the 1.6 million-barrel-per-day peak in the pre-Gaddafi era, but it is also sharply down from levels seen just a few months ago. We reported on the IS attacks last month on the Mabruk oil field, which is a joint venture between Libya’s National Oil Company and Total SA (NYSE: TOT). The 30,000 to 40,000 bpd field was attacked again on March 3, and IS militants destroyed oil tanks and damaged the control room, according to the Wall Street Journal. Libya’s oil workers have taken heroic efforts to keep oil production and exports flowing – as the only major source of export revenues – but the country’s fight against IS militants appears to be taking a turn for the worse.

On a more positive note, Russia’s Gazprom announced on March 5 that it had received a $15 million payment from Ukraine for natural gas, avoiding a cut in deliveries for the time being. The standoff had threatened to cut supplies of natural gas to Ukraine and the rest of Europe, but the payment will cover an estimated five days’ worth of supplies. Still, it is unclear how Ukraine will be able to come up with enough money to cover what Gazprom says is a debt of at least $2.4 billion.

On the corporate front, there is one oil company whose fourth quarter earnings figures stand out from the pack: Canadian Natural Resources (NYSE: CNQ), a major producer of oil sands in Alberta. Instead of seeing profits decline, Canadian Natural saw its profits nearly triple in the fourth quarter from a year before. That is because it more than offset the decline in prices with a massive ramp up in production. Canadian Natural’s output was up almost 30% for the year. Still, spending reductions and cost trimming are slated for the company this year.

Growth in the global natural gas trade is expected to continue to climb rapidly. Worldwide trade in liquefied natural gas (LNG) is expected to reach $120 billion this year, making it the second most valuable commodity, according to Goldman Sachs. The $120 billion figure will allow LNG to overtake iron ore in terms of the value traded. The strong growth is the result of major supply expansions that are expected to come online this year and next. More liquefaction capacity will mean an erosion of the practice of linking the price of LNG to the price of oil under long-term contracts. In its place will be an increasing reliance on the spot market, giving greater leverage to buyers. Over the next ten years, LNG is expected to see a 5.1% growth rate.


By. James Stafford of Oilprice.com

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