Oil rout will save Asian LNG importers billions this year
Paris, France | – The dramatic collapse in oil prices is still insufficient to stimulate crude consumption as weakness in the economy has cancelled out the benefits of cheaper crude, the International Energy Agency said Friday.
Although prices are expected to remain depressed in the short-term, there are now signs that the tide will turn, the agency added. Crude prices have crashed to near six-year lows, plunging some 60 percent from June over a supply glut and weak demand. “How low the market’s floor will be is anyone’s guess,” said the IEA in its latest monthly report on the oil market.
“A price recovery-barring any major disruption-may not be imminent, but signs are mounting that the tide will turn.” That “rebalancing may begin to occur in the second half of the year”, the IEA said, adding however that this does not imply a price recovery to recent years’ highs as the market is “undergoing a historic shift”. “OPEC’s embrace of market forces last November is a game change,” it said, referring to the cartel’s decision to maintain production levels despite plunging prices. The shale energy revolution in the United States has also changed the landscape, it said.
Non-OPEC output declines
Any change in direction of oil prices would be due to the supply end as energy companies have begun axing budgets and cancelling new projects. The IEA said it was slashing its forecasts for non-OPEC supply growth for 2015 by 350,000 barrels a day from last month’s report. Colombia led the declines, said the IEA, cutting its forecast for Colombian production by 175,000 barrels a day. Canada’s was slashed by 95,000 barrels a day.
Among the latest casualties of the price rout was a $6.5 billion project in Qatar, which Shell scrapped this week. But these actions will only have an impact on prices “further down the road”. Demand, which would have an immediate impact on prices, does not appear to be picking up. “With a few notable exceptions such as the United States, lower prices do not appear to be stimulating demand just yet,” said the IEA.
“That is because the usual benefits of lower prices-increased household disposable income, reduced industry input costs-have been largely offset by weak underlying economic conditions, which have themselves been a major reason for the price drop in the first place,” it added. The agency therefore maintained its oil demand forecast for 2015, expecting it to grow by 0.9 million barrels a day to reach 93.3 million barrels. Brent North Sea crude for delivery in March was trading just under $50 on Friday, while US benchmark West Texas Intermediate for February was changing hands at around $47.
Cutting electricity costs
A steep drop in crude oil prices will save top Asian economies tens of billions of dollars on their liquefied natural gas (LNG) import bills this year, cutting electricity costs for consumers after years of pain. Prices of long-term LNG supplies delivered by tankers to Asia are tied to the cost of Brent crude oil, which has fallen by more than half since June. The extent of oil’s price slide has not yet been fully passed through into lower Asian LNG sales prices because contracts have delays of six to nine months built into them.
A classic pricing formula for a 20-year LNG supply deal is composed of a “slope”, or percentage, to crude oil, usually set at 14.85 percent as seen in recent sales from Australia and Papua New Guinea to Asian buyers. So when oil trades at $100 a barrel, the LNG price is $14.85 per million British thermal units (mmBtu), plus a small premium of around $0.80 per mmBtu added on top.
“The fall in oil prices will slash the LNG bill for Japan, South Korea, China and Taiwan by over $35 billion in 2015 compared with prices in 2014,” said Kwok Wan, head of the LNG desk at price reporting agency Argus. The four countries imported a combined 116 million tons of oil-linked LNG last year, around half the total for Asia.
Paying less for energy
The discount is calculated using the Brent crude oil forward curve for 2015, which gives the current cost for Brent crude for delivery from now until the end of the year. For Japan and South Korea, it should provide welcome respite for retail electricity consumers by reducing utility bills sent soaring following Japan’s 2011 Fukushima nuclear disaster, which spurred gas demand across the region.
Collapsing oil prices have made long-term, oil-linked supply cheaper than supply procured on spot markets for the first time in years. The current spot LNG price for March delivery is $9 per million British thermal units (mmBtu), compared with a long-term LNG price of just under $8 per mmBtu, according to Thomson Reuters analysts.
Once the current cost of oil at $50 is fully factored into gas contracts, the long-term price could sink down to around $6.50 per mmBtu, establishing a sizeable discount to spot prices. “If LNG is bought under an oil index contract buyers will make savings, not right away, but from the second-quarter 2015 the lower oil prices will feed into lower LNG contracted prices,” Societe Generale analyst Thierry Bros said. “These are midstream companies so they will have to pass this to customers,” Bros said. “We will pay less for energy.” – Agencies