Due to Covid-19 and its effect on the energy market, oil prices more than halved since the beginning of March. For that matter, today’s oil price is almost less than the 1973 Oil Crisis ($20-21 in 1973, $22-23 today). As one of the greatest producers in the world, China has slowed its production and had a break in most sectors to protect society from the new Covid-19 Pandemic. Because of that, as expected, the price of other energy resources would decrease, at least in Asia. However, the collapse of Brent Oil did not stop Asian LNG month-ahead prices to recover by an impressive 20% increase. Even though LNG prices are known as dependent on oil prices, according to data of the last two weeks, LNG is losing its dependency related to price.
Pandemic starting from China has affected all sectors around the world, but especially the energy market. Because China is the shining star of today’s industry and the world’s largest gas importer (61.5 MTPA in 2019), price decrease in energy sources was expected. However, probably due to opportunistic buyers in India and China, an unexpected increase has been observed in recent weeks. If the decrease in oil price continues, we can see a different world at the end of 2020 since oil has been losing its importance for the last few decades. New, more efficient, and cheaper alternatives have started to replace and overthrown oil in the arrangement, but the Oil Price War in 2020 can be a quarterback in the energy market.
The dilemma is low prices coupled with weak demand if oil prices hit $10 per barrel that puts oil-indexed pricing below spot prices. Not suitable for producers but a gift to consumers. Unlike oil, LNG producers cannot only ramp up production to compensate for lower prices. According to the graph, traders will take advantage of filling tanks because there is an uptick expectation. To paint a picture in the next few weeks and months, recent developments should be controlled.
On the other hand, again due to Coronavirus, LNG Canada which is a project of Shell with 40% stake, Malaysia’s Petronas with 25%, PetroChina with 15%, Mitsubishi with 15% and South Korea’s Kogas with 5% have laid off 750 people to prevent production before the virus reaches the construction site of liquefaction facility. These preventions taken by LNG companies can also cause a decrease in LNG supply and an increase in LNG price.
Furthermore, European gas demand is expected to decrease by 0.7% in 2020 compared to expectations measured before Covid-19 Pandemic. Previous expectations were about a 6 Bcm increase. However, growth will probably be limited by only 2 Bcm, according to Rystad Energy’s most likely scenario. Less demand coming from Europe can also be a parameter related to the LNG market, but it is not a significant change, though.
According to LNG experts, It is time for LNG prices to decoupling oil, and oil-indexed prices for LNG contracts was a necessary action in its own time. However, today, LNG must take off as a commodity for the sake of the energy markets as a whole. Prices indexes to oil would only distort the market fundamentals’ view of the LNG. Because these two resources have different consumers, suppliers, producers, and markets, indexing to each other creates imbalance, instability, and unpredictability. Their price correlation must be cut as far as sectors and markets can do it, they say.