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LNG prices set to fall by a third, in blow to energy giants

LNG prices are forecast to drop by a third in the coming months following a steep decline in the oil price, hitting the earnings of some of Australia’s biggest energy companies.
Australian gas prices have come off historic highs of about $20 a gigajoule caused by a combination of high oil prices and a lack of domestic supply.

Australia is forecast to overtake Qatar to become the world’s top LNG exporter this year, shipping around 82 million tonnes of LNG in 2019.

Now a slumping oil price is helping to drive LNG prices down to its lowest point since 2017.

“LNG prices are going to fall sharply in coming months. This is not a surprise, as it follows the lower oil prices of three to six months ago,” Shaw and Partners analyst Stuart Baker said.

“A steep drop is coming,” he said.

“[LNG’s] linkages to oil, and delays in pricing, mean that the collapse in global oil prices which occurred last November have yet to show up in delivered LNG prices but that will surely happen in the coming months.”

The Brent crude oil price reached a four-year high of $US86 a barrel in October last year but quickly fell off a cliff, slumping to a one-year low of $US50 a barrel the day before Christmas. It has since recovered slightly to about $US67 a barrel.

The oil price was forced down by a flood of new US oil production, with UBS forecasting an average 2019 oil price of $US65 a barrel.

Mr Baker said LNG prices hit $US10.8 per million British thermal units (mmBtu) in the fourth quarter of 2018, with expectations it will drop to about $US7.3 per million mmBtu in April and May. One gigajoule is close to the equivalent of one mmBtu.

Oil Search and Woodside are the Australian energy companies most likely to be hit by a falling gas price.

Credit Suisse research said Oil Search earnings could fall 5 per cent, and Woodside’s around 4 per cent, in 2019 and 2020 on the back of lower gas prices.

The Australian Competition and Consumer Commission (ACCC) has also forecast falling gas prices.

In its latest LNG netback price monitor – a measure of export prices minus processing and transport costs – the ACCC forecast a 2019 average gas price of just under $8 a gigajoule. This is a reduction from an average $12 a gigajoule it forecast earlier in the year.

This should be a boon for energy-intensive businesses, such as manufacturing, which have been under pressure due to high gas costs.

ACCC chairman Rod Sims has previously warned that unless the gas price fell many Australian manufacturers would collapse.

Manufacturing Australia chief executive Ben Eade said the industry was still facing high contract gas prices.

“There’s still a disconnect between what is happening in global markets and what we’re seeing with gas contracts on the east coast of Australia,” Mr Eade said.

The Australian government is more bullish on gas prices. The Department of Science, Industry and Innovation’s latest Resources and Energy Quarterly report expects gas prices to hover around $12 a gigajoule for the next four years.

Bell Potter research said any price falls would only be short-lived and expects higher LNG prices ahead.

“An LNG supply deficit globally, coupled with ongoing risks to Australian domestic supplies, should see sustained higher gas prices on the east coast of Australia,” Bell Potter analyst Stuart Howe said.

Woodside’s share price was down 0.4 per cent to $34.71 at the close of trading on Friday, while Oil Search was down 0.5 per cent to $7.87.

Source: Sydney Morning Herald