Here's How to Profit in a Gas Glut
There’s a change taking place in the liquefied natural gas market, and it could alter the commodity’s outlook for the foreseeable future.
Know, first of all, that LNG is in a glut.
There is currently more than enough on the market to satisfy demand.
But far from making it an unworthy investment, this sets investors up for an opportunity the likes of which you may have just missed in oil: buying the dip.
You see, LNG is no longer being bought and sold with the same old 20-year contracts we’re used to. Now, the opportunity we’re facing today hinges on just one thing...
Will It Sell?
In a glutted market, finding buyers is often more of an auction than a race.
The name of the game is “affordability.” Numerous sellers petition to limited buyers in hopes of gaining a long-term customer.
This has been especially true in the LNG market of late.
In 2016, the U.S. finally began exporting the vast natural gas supply it had gathered from the ongoing shale boom. After years of exporting only to Canada and Mexico, U.S. supply was finally free to travel across the world.
The success of this venture, even as supply has outstripped demand, can be seen in a single stock chart:
This is Cheniere, the company that enabled the first U.S. LNG contracts to travel across the ocean to Europe and Asia early last year.
Today, it owns the U.S.’s only LNG export terminal, but that won’t be true for much longer...
Of course, with natural gas demand booming, the U.S. isn’t the only country bringing more LNG capacity online. As of 2016, global LNG exports reached 340 million tonnes, a jump of 20% from just five years prior.
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Australia and Qatar, historically the biggest producers and exporters of LNG, are pushing more exports to cover increasing demand in both Asia and Europe.
Australian exports are expected to increase around 63% this year as compared to last year, and Qatar has announced that it will finally allow the development of its massive North Field, the largest natural gas field in the world.
Still, with prices on the rise again and taps running on full, the U.S. is expected to be a top LNG supplier behind these two behemoths by 2040.
But that’s not the change that’s putting LNG in a new light.
In the Buyer’s Court
For the most part, LNG purchases are long-term affairs.
Buyers will contract a supplier for 20 years or more, and though the pricing varies by source and destination, certain suppliers simply have better deals to offer due to cheaper, more abundant supply.
The U.S., even through the glut, is still one of these suppliers, one of the biggest reasons it’s expected to catch up to the market’s biggest players.
But there’s a catch... setting the price may no longer be in the hands of suppliers.
The glut has made LNG into a buyer’s market. Countries can now demand deals on supply, or threaten to switch to one of many competitors.
What’s made this all the more common is the trend of suppliers looking to cash in on the surge in demand from developing economies. These new buyers are getting amazing deals on new LNG contracts, which are both shorter and cheaper than traditional contracts.
And longtime customers want in on those deals, too.
What we’re seeing is a switch from a long-term market, with rules about how LNG cargoes are to be bought and sold, to a short-term market with more flexibility, especially on the buyer’s side.
The key to taking advantage of this new market regime will be flexibility from both buyers and suppliers.
Keep the Flow Going
It won’t be the exporters like Cheniere that take home the biggest checks as this trend progresses.
No, the companies cashing in on this new market regime the most are those keeping the supply side flexible and ready to adjust to the buyer’s market.
I’m speaking, of course, of pipelines.
Companies adding capacity now have the most to gain in the next few years as exports continue to climb and contracts continue to shorten.
In this new age of LNG, it’s pipelines or bust.
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.
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