Looking on the bright side of the LNG glut

The economic downturn has caught several investors in liquefied natural gas at an inopportune time. New liquefaction plants and expansions in Russia, Qatar, Indonesia and Yemen are all adding capacity just as demand has collapsed because of the downturn in the economy. But the decline in demand may prove less dire than some have predicted, argues Barclays Capital in a recent note. On top of that, if you squint hard enough you’ll see an energy security silver lining.

Barclays argues the drop in demand has in fact not been as bad as economic indicators, such as industrial output, would suggest. Analysts don’t know where the excess gas in going to end up: in Europe, where prices are relatively high still and inventories are 40 per cent lower than last year, offering a potential harbour for some of the excess supply left over from leaner Asian demand, or in the US, which has more storage options than in the rest of the world, but where the price drop has been steeper.

Economics 101 would suggest that as long as there is enough regasification capacity storage, tanks in Europe will fill until they are brimming or until prices fall in line with the US (including any transport costs/savings that need to be factored in).

That would not be such a bad deal for Europe, or the US in terms of energy security. For Europe it would mean a relatively cheap opportunity to bolster reserves and decrease dependence on Russia, Europe’s troublesome big gas supplier. For the US, LNG heading to Europe first would buy a little extra time for struggling natural gas producers from Canada and the US who are being forced to lay down their drilling rigs in increasing numbers as prices are pinching their profits.

But as Barclay’s points out the fungibility of the LNG market is a relatively new phenomenon. The coming months will be an interesting time to test whether LNG is indeed the path to a economically saner and more secure international gas market.

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