US elections watched closely for impact on foreign policy
A bearish oil price view for 2025 is likely to have an overhang on LNG trading but the market will still be dominated by supply-demand factors according to market participants at S&P Global Commodity Insights APPEC 2024 conference in Singapore. The contracted LNG market is largely oil-linked and executives at the conference said oil prices could drop to the $60-$70/b range in the coming year due to growing supply from OPEC and the US, and easing demand in China. This equals around $8-$9/MMBtu for LNG cargoes at an oil slope of around 13%, which is highly competitive with spot LNG prices. Platts assessed the JKM, the benchmark price for LNG cargoes delivered to Northeast Asia, for October at $13 12/MMBtu on Sept.
“With a bearish view on crude oil prices out to 2025, this means the cost of LNG under long- term contracts will be lower. However, this may not translate into lower spot LNG prices this upcoming winter. The spot JKM price will likely be determined by supply-demand fundamentals, especially if the balance is tight in the event of a cold winter,” said Zhi Xin Chong. Research and Analysis Director. S&P Global Commodity Insights “While there are some minor fuel switching capabilities from gas to oil in Japan, Pakistan and Bangladesh, we expect switching to only be at the margins, which would have a relatively minor impact on LNG demand Chong said.
Marginal trading
Competitive oil-linked LNG prices will however influence other aspects of market behavior. Buyers will be unlikely to exercise their downward quantity tolerances (DOTs) that reduce their term offtake in favor of spot LNG volumes, leaving sellers with fewer trading volumes to offer into the market and also pushing them to meet contractual supply obligations, market participants said. At the same time, portfolio players and traders will be more incentivized to divert flexible oil- linked term volumes into the spot market if spot prices are high enough. Chinas national oil companies have previously resold oil-linked LNG to benefit from higher spot prices a useful strategy when domestic gas demand is tepid. For Asia Pacific importers like Japan, South Korea, China and Taiwan, oil-linked LNG and natural gas prices form a large portion of gas imports and lower prices significantly reduce gas and power bills.
Cheaper oil-linked LNG and pipeline gas for China will also boost demand and affect domestic markets as the NOCs – PetroChina, Sinopec and CNOOC-have to balance pipeline gas sales contracts, domestic production, and spot and term imports US election. While ail executives were largely bearish, the discussions also centered around US elections. “Who is in the White House or running for control of Congress in the US from one period to the next can create some tailwinds or headwinds, Helen Currie, Chief Economist. ConocoPhillips. said at the conference. “Most companies are geared to work through whatever happens from both sides of the aisle. It may impact the timing of some plans, depending on permitting and details.
But in general, people are looking at what are the best places to deploy capital. Currie said. She said the industry tends to overlook the amount of drilling and completion activity needed just to offset any production declines, and the huge amount of capital still needed to keep output steady or grow it. Ben Luckock, Global Head of Oil Trafigura, said 90% of what the industry cares about regarding the US elections is the implications for foreign policy, where there are marked differences between candidates “I would focus on what it means for the foreign policy, not domestic policy,” he said at the conference.
“I guess I’d be more concerned about what happens in the Middle East that gets out of control from an energy perspective. And then the Iranian situation. A bit sanguine about what it means for Russia”, Luckock said in response to a question about geopolitics.
Long-term contracts
Meanwhile, long-term LNG contract discussions also factor in oil prices, and with expectations of oil prices in the early $70s per barrel, oil-linked contracts become very competitive especially with spot LNG prices expected to come under pressure from a wave of new projects.”The longer-term Brent oill price track is unchanged, with an average constant dollar price of about $73/b from 2030-40 and $67.6/b from 2040-50, according to Commodity Insights latest oil market report
“The funny thing about the US president is he or she probably will have more influence on foreign oil production and flows in 2025 than on domestic US crude oil production, Jim Burkhard. Vice President, Research, S&P Global Commodity Insights, said at the conference. “That’s the real difference.”
But OPEC is walking the tightrope “Will OPEC sacrifice price to allow production to rise, to maintain unity? I think that is really the dilemma they’re faced with. I do think they’ll succeed at maintaining unity and that may lead to more supply, lower prices, but not the type of situation we saw in March or April of 2020, Burkhard said. Headline oil prices cratered to below Szo/b in March/April zozo as the COVID-19 pandemic hit markets at the same time as Saudi Arabia and Russia engaged in an oil price war.
Source: Platts
