NYC-based PIRA Energy Group reports that LNG marketers face a drop in the contract price perceptions.
Negotiators of long-term LNG contracts are in the midst of a massive recalculation of what a bearable price means for both buyers and sellers. Sellers are facing lower oil-indexed prices, but a lack of clear consensus has emerged on how and when costs will come down to justify a lower price. Buyers are relieved that the market has come to their pricing point, but now they are faced with the potential that even their previous targets may have been too high, says PIRA in its report.
The reported 216 BCF withdrawal in the U.S. last week marked another 10 BCF “miss” versus consensus expectations that were again in the mid-to-high 220s. Unlike the previous week’s miss, which hinted at a market 10 BCF (1.2 BCF/D) tighter than expectations, last report suggested the opposite, 10 BCF looser, making both reports difficult to reconcile with one another.
PIRA adds that a massive year-on-year end-March gas storage surplus and further supply gains will mandate record high gas-fired electricity generation. April and May will provide a stress test of how low gas prices need to go to stimulate sufficient coal-to-gas switching to prevent excessive storage builds. For 2015, the U.S. gas balances highlight the tradeoff between rising production and required coal-to-gas substitution. In contrast, 2016 gas balances emphasize structural demand growth, stagnant supply and a prospective gas price recovery tied to the reversal of some coal-to-gas substitution.
January U.S. gas exports to Mexico have moved above the 1.9 BCF/D hurdle in place for 1Q14 as volumes on NET Mexico ramp up, reports PIRA. Innocuous balances of late will be more striking in the months ahead as the call on U.S. supply accelerates as a result of stagnating domestic production. The past year’s demand increases should pale in comparison to the growth anticipated in 2015 and 2016 as new gas-fired electricity generation projects come online, enabled by ongoing additions to both cross-border and internal transportation infrastructure.