Downward pressure building in oil and gas price

TWO months ago Slugcatcher annoyed some readers by noting that world events were moving in such a way as to present “the threat of a sharp oil price fall”. In retrospect the timing was not quite right, but the result is pretty much as expected with both oil and gas prices dropping sharply over the past few weeks.
Downward pressure building in oil and gas price Downward pressure building in oil and gas price Downward pressure building in oil and gas price Downward pressure building in oil and gas price Downward pressure building in oil and gas price

ENB's infamous Slugcatcher

Tim Treadgold

The cause of the fall, which is plain for all to see, is a worldwide surplus of oil and gas. Just to further annoy any sight-impaired reader it is as easy now, as it was on May 12, to see the surplus growing further and prices falling further.

What’s happening is that the energy world, which includes coal, nuclear and renewables, as well as oil and gas, has moved well beyond the threat once seen in Peak Oil theory to arrive at a new dilemma called Oil Glut – or, to be more accurate, Energy Glut.

For everyone in the oil and gas business these are interesting times because the script is being re-written daily, with project development plans being hastily altered every time there is another downward movement in prices.

The big news last week included US oil prices sliding to their lowest in two months and reports that cargoes of LNG were being sold in Asia at prices which were half the level of earlier in the year.

Other developments in the energy world were almost as interesting, including further evidence of gas being substituted with low-priced coal in some power stations, Korea and Japan moving steadily to re-start mothballed nuclear reactors, and Russia taking a fresh step to boost its LNG and oil exports by revealing a plan to permanently open the sea lanes through the Arctic Ocean.

On oil markets these developments started to bite the oil price in mid-June, a month later than The Slug suggested that the winds of change were blowing through the industry.

After peaking at around $US108 a barrel on June 16, West Texas Intermediate oil for August delivery eased back to around $US101/bbl – the lowest price since May 12, the day Slugcatcher forecast the correction.

The price decline cannot yet be called a sharp fall but the trend is significant.

So, what did happen last week? The US oil price was hit by the simple problem of abundant supplies, whereas the falling LNG price is more complicated and potentially more damaging to Australia.

According to an analysis by the Platts energy reporting service the price of spot LNG has fallen from around $US20 per million British thermal units to around $US11/MMbtu, the lowest since March, 2011.

The fall does not affect LNG sold under long-term contract but the spot price does eventually feed into long-term contracts.

Even in Europe, where gas prices are supposed to be rising thanks to ongoing fighting in eastern Ukraine there are signs of falling prices.

The latest developments in the energy market should be sufficient warning that the world is not running short of oil and gas, and certainly not short of energy in its many forms, there were three other events to make an oil and gas man sit up and take notice.

First came news that Russia is pushing ahead with plans to permanently open its Arctic sea route with a Japanese and Chinese company creating a new business to haul LNG from northern Russia to markets in Asia.

The new Russian LNG will come from the Yamal project in western Siberia with three new LNG carriers and associated ice-breakers being ordered from Daewoo Shipbuilding in Korea.

Then came a report from Queensland that the US engineering firm, Bechtel, had delivered and installed the key components of the first LNG train at the Curtis Island facility of the Gladstone LNG project – a development which looks like delivering its first cargoes into a full market.

And finally came events which no self-respecting oil man would bother to notice – a stock market boom in the key minerals used to make the long-life batteries used in electric cars.

Graphite and vanadium are the minerals which sent the share prices of a host of small companies into orbit last week thanks to continued speculation that electric cars will, one day, rule the road.

The Slug’ been around long enough to know that it will be many years (decades, more likely) before electric cars outnumber conventional gasoline and diesel vehicles.

But, when you consider where the hot money was flowing last week, plus the crash (and it is a crash) in spot-cargo LNG prices, and the slide in US oil prices and it’s much easier to see that the May 12 warning about oil prices being on the cusp of significant should not be ignored.