Thursday, July 2, 2020

"U.S. LNG Industry Needs Prices To Double"

From OilPrice, June 26:
Last week, Tellurian said it would make the final investment decision on the Driftwood LNG project next year. On the one hand, the news is good: Tellurian had stopped making updates on the project after its long-term supply deal with India’s Petronet fell through. On the other hand, the announcement makes it the latest in a string of LNG companies pushing their FIDs back by a year, and this does not bode well for the industry. It is enough to look at the reason why Tellurian postponed its final investment decision, as explained by the chief executive: the company needs gas prices--specifically, Asian spot market prices--to be over $5 per million British thermal units (mmBtu). Right now, LNG trades at about $2 per mmBtu. Can it climb more than 100 percent within a year?

According to Shell, prices will rise by next year because new supply will be slow in coming this year. But that forecast was made in the supermajor’s LNG Outlook 2020, which was released in February. Since then, Shell has pulled out of the Lake Charles LNG project and is reportedly mulling over the sale of a stake in its Australian LNG business. While the latter is likely part of a divestment program running from before the crisis, the exit from the Lake Charles project is interesting, especially in light of the company’s continued optimism about the LNG market.

The company cited market conditions in its decision to pull out from Lake Charles LNG. India’s Petronet must have had the same market conditions in mind when it let its preliminary long-term agreement with Tellurian expire. Right now, LNG is much cheaper on the spot market than in long-term supply contracts. It is this price disparity that is changing timelines and pushing back FID dates. And ironically enough, it is U.S. LNG producers that contributed to this situation, though not willingly....

We still think U.S. spot or near futures can see $3.50 but the wildcard is oil. If Cushing prices trade at current levels or higher there will be more oil produced than we were looking for back in April and with the oil comes the "associated" gas, keeping a lid on prices.

The other factors to be aware of are generally cooler than average temperatures so far this season, meaning less demand for air conditioning: the last EIA Weekly Update had population weighted Cooling Degree Days running at -12 for the last week reported (no update this week, they get the holiday)

The last negative impact is from LNG shipments, which at 25 Bcf are half of some weeks in February and March.
And that 25 Bcf shortfall is enough to move prices by 10% on storage report day