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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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LNG Prices Soar On Rising Geopolitical Tension

LNG vessel

As President Donald Trump threatens to launch missile strikes in Syria over a suspected poison gas attack, and continues his harsh tone against Russia, tensions between Saudi Arabia and Iran in Yemen’s proxy war continue to mount.

These key geopolitical developments have placed tremendous upward pressure on global oil prices, but there is another take away that is often being glossed over in energy news – this tension also has a significant impact on global liquefied natural gas (LNG) prices.

How we got here

Trump said on Wednesday that missiles “will be coming” in response to the attack in the Syrian town of Douma on April 7. He also chastised Moscow for standing by Syrian President Bashar al-Assad. Yet, on Thursday, Trump back-peddled, stating on Twitter: “Never said when an attack on Syria would take place. Could be very soon or not so soon at all!”

Also, on Wednesday, Saudi Arabia faced what the Associated Press (AP) called a flurry of attempted attacks by Yemeni rebels. Saudi Arabia’s defense forces said they intercepted missiles that targeted key infrastructure in Riyadh and another city, and drones targeting an airport and an Aramco oil facility in the country’s south.

Impact on LNG

Correspondingly, Asian LNG prices this week rose by 25 cents from last week to $7.25/MMBtu, despite falling demand due to the onset of spring in the northern hemisphere. Historically, prices drop in the warmer weather months as demand for the super cooled fuel recedes. Related: Saudi Arabia’s $80 Oil Target Could Backfire

For example, this past winter as China ramped up gas demand as part Beijing’s mandate to replace dirtier burning coal needed for power generation with gas, LNG prices breached the $11/MMBtu mark, the highest in three years. However, almost on cue, gas prices have dropped nearly 40 percent since those January highs due to warmer temperatures.

Oil price linkage

In Asia, most natural gas is imported as LNG, while the price is indexed to crude oil on a long-term contractual basis, though there has been an increase in spot and short-term trading in recent years. Consequently, geopolitical pressure on oil prices also impacts LNG prices.

The Asia Pacific market accounts for around three-quarters of global LNG trade and one-third of global natural gas trade. Moreover, increased gas and LNG demand growth in Asia will largely be driven by China.

Since there is currently no globally integrated market for natural gas, pricing mechanisms vary by regional market. Internationally traded natural gas has also been largely indexed to crude oil prices such as North Sea Brent or Japan customs-cleared crude (JCC) because of the liquidity and transparency of crude oil prices and the substitutability of natural gas and petroleum products in certain markets. Related: Are Oil Markets Tightening Too Fast?

The possibility of higher LNG prices due to its oil price indexation and geopolitical risk could prove a boon for LNG projects outside the U.S., especially those that still need to sign long-term supply agreements to reach the all-important final investment decision (FID) to move forward. U.S. projects, for their part, offer Henry Hub-linked LNG pricing.

More geopolitical pressure on prices

Reuters, citing traders, said the LNG price gain this week was due to rising oil prices, as Brent crude futures hit their highest level since late-2014.

“Oil is by far the world’s biggest energy market. It dictates the direction for most other commodities,” said one trader. “It is particularly important for gas and LNG as many supply contracts are priced off crude.”

Global oil prices held steady on Friday but remained close to recent highs. Global benchmark Brent crude settled at $72.58 a barrel, up 56 cents by the end of the session, while U.S. benchmark, NYMEX-traded West Texas Intermediate (WTI) crude futures were up 32 cents to $67.39. Prices for both climbed in post-settlement trading.

Walter Zimmerman, chief technical analyst at United-ICAP, said “it does look like there's further upside ahead. People are still nervous about what's going to happen in Syria ... nothing was solved overnight."

By Tim Daiss for Oilprice.com

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