Several factors have sent global LNG prices tumbling lower over the past year and narrowed regional price differentials, limiting clear-cut arbitrage opportunities.
In the spot market, buyers purchase cargoes on an as-needed basis to supplement volumes covered by firm supply agreements. According to data from the International Group of Liquefied Natural Gas Importers, spot cargos and contracts less than one year in duration accounted for about 28 percent of the global LNG market in 2015.
Several factors contributed to the retrenchment in spot prices and the narrowing price differential between Asian and European markets.
For one, the bumper crop of large-scale liquefaction projects in Australia has started to come onstream, ensuring that Asian markets remain well-supplied and stemming the flow of re-exported cargos from Europe and flexible volumes from Qatar, the world’s leading LNG producer.
In recent years, the wide price differentials between the Asia-Pacific region, where rapid demand growth and insufficient supply drove a spike in spot prices, and Europe incentivized Continental buyers to re-export significant volumes to take advantage of the arbitrage opportunity.
But global re-exports of LNG tumbled by 37 percent in 2015, as the growing local supply in the Asia-Pacific basin closed the arbitrage window and curtailed LNG shipments from Europe to the region. All told, European re-export volumes slipped to 3.6 million metric tons per annum from 5.9 million metric tons in 2014. Expect this trend to continue.
Meanwhile, Qatar’s exports to China, Japan and South Korea over the first five months of 2016 plummeted by 18.7 percent from year-ago levels. These pressures have prompted RasGas and Qatargas, the state-owned LNG companies, to move aggressively to retain existing customers and ink new contracts by offering improved terms that reflect current market realities.
These headwinds will continue over the next few years, as the rest of Australia’s mega-projects come onstream and legacy LNG supply contracts at Indonesian liquefaction sites expire, ensuring that LNG prices in Europe and the Asia-Pacific region remain under pressure.
In addition to the 53.8 million metric tons per annum of LNG export capacity still under construction in Australia, the US has a whopping 62 million metric tons per annum in the works, with operators making their final investment decision on three projects last year.
Your complete guide to energy investing, from growth stocks to high-yielders.
In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on May. 26, 2021
Balanced portfolios of energy stocks for aggressive and conservative investors.
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
Our assessment of every energy-related master limited partnership.
Roger Conrad’s coverage of more than 70 dividend-paying energy names.