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MOSL: OIL & GAS: High tide to leave long lasting treasures; Higher spot LNG prices bode well for the future

OIL & GAS: High tide to leave long lasting treasures; Higher spot LNG prices bode well for the future

 

• As a result of a demand-supply mismatch, spot LNG prices rose to USD38/mmBtu from USD2/mmBtu in May'20.
• Our research shows that higher spot LNG prices have resulted in a culmination of more long term LNG contracts in CY21, thereby raising the Final Investment Decisions (FIDs) for LNG liquefaction terminals going forward.
• Higher number of FIDs would help increase the supply of LNG, thereby reducing the slope of gas to oil. Favorable gas prices would bode well for India's Gas sector in the medium term. Key beneficiaries: GAIL, GUJGA, GUJS, and PLNG. 

Higher spot LNG prices, a blessing in disguise

• From a low of USD2/mmBtu in May'20, spot LNG prices have risen to USD38/mmBtu on: a) delays in upcoming LNG terminals due to the COVID-19 pandemic, b) increased demand from China due to the replacement of coal, and c) supply disruptions, primarily in the US.
• On the brighter side, higher spot LNG prices have revived the long-term LNG market, with the signing of ~32mmtpa of SPAs (sales and purchase agreements) in CY21 till date as against 22-23mmtpa each in CY20 and CY19.
• Higher long-term SPAs are likely to result in more FIDs, which over the next few years would result in a decline in spot LNG prices (Exhibit 1) and thus the slope of gas to oil, thereby favoring consumption of gas over oil.