From Goldman comes new analysis with which I completely agree:
Rising spot supply shifts the balance of power to consumers
LNG trade is set to exceed US$120 billion in 2015, overtaking iron ore to become the second most valuable physical commodity after oil. Growth will continue as new liquefaction plants come online, but the correction in energy markets under the New Oil Order is resetting price expectations and the LNG market is entering a period of structural change. In particular, the imminent arrival of US supply will link LNG to the world’s largest gas market, increase the volume of flexible supply and increase the bargaining power of consumers looking to diversify from traditional long term contracts.
…In our view, increasingly assertive buyers will gradually turn away from long term contracts and spot trade will account for a growing share of global trade, leading to increased competition among producers. As contract and spot prices diverge, oil-indexation will continue to lose its appeal. Producers, on the other hand, will be faced with two related challenges: costs must be rebased in order for project economics to be viable in a low price environment, and alternative pricing mechanisms are needed to manage the risks associated with such a capital intensive industry. In other words, there is a window for LNG to grow and become a normal commodity that is priced according to its own fundamentals rather than those of different, if related, commodities.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
