LNG Markets Will Strengthen Post Crisis

LNG Markets Will Strengthen Post Crisis

Published on March 31, 2020

Neal Shear, private investor in energy assets and adviser to private equity funds, shares his view on the future of LNG post COVID-19 crisis. 

The LNG markets were suffering prior to the full blown COVID-19 pandemic. The current situation of excess liquidity is being exaggerated by economic slowdowns across the globe. These are the moments when transparent spot and forward markets provide liquidity in a host of financial and commodity markets. LNG is a nascent market and the current crisis will motivate market participants to seek out liquidity and expedite the growth of LNG spot and forward market prices.

LNG is natural gas on a ship headed to a discharge point to be consumed by end users that make up wholesale and retail markets. Therefore, it is its value at destination that creates a price for the commodity. The market should support strong price discovery in a few key destination markets to provide the basis for effective liquid contract markets or benchmarks. The market has already established liquidity points at Henry Hub in North America, TTF/NBP in Europe and JKM in Asia, although it is still not clear this will prevail as the only marketplace with liquidity in the Asia region.

Regional natural gas suppliers in the Middle East, Australia and the US Gulf Coast provide buyers with the opportunity to establish geographically diversified portfolios that enhance their energy security. The regional indexes that establish the price for buyers in many instances may not be the same index they use to establish their selling price, leaving the buyers with a variety of market risks they do not want to carry on their books. Natural gas producers, who traditionally price their products linked to the benchmark pricing index of their regional market, may want to diversify their exposure to local indexes by pricing the natural gas using an alternative regional benchmark. Liquid spot and forward markets provide all market participants with the means to reduce risk and volatility whilst at the same time maintaining their geographic energy security goals. Forward/futures markets in LNG shipping will complete the legs on risk management tools to support competitive markets and arbitrage.

Pricing LNG/natural gas off crude oil and petroleum product markets is no longer an effective means for competitively developing markets. This pricing mechanism was developed and grew in point to point markets but is no longer effective, since natural gas pricing in destination markets no longer correlates with baskets of crude oil and petroleum products. Natural gas burns cleaner than liquid oil products with a smaller carbon footprint. This becomes more important as producers and consumers are required to include the cost of carbon into their energy prices. The time to separate the pricing of LNG from oil liquids is long overdue.

Politicians often say never waste a good crisis. The same goes for LNG markets and its many participants. The current crisis should motivate all market participants to use the current organized markets with their clearing mechanisms to access liquidity, manage risk, enhance security of supply and provide transparency. At the same time players in the long-term contract market can continue to term up supply with visibility and transparency as buying exclusively from the spot and short-term markets will never satisfy their need for guaranteed supply.

The LNG market will come out of the dual crisis of COVID-19 and product oversupply with better liquidity and risk management tools that will provide a firm base for global growth of the world’s preferred fuel for power generation and industrial usage and transportation.