Gas cartel lunacy exposed again in Asian price crash

This is what happens when a gas cartel ships too much gas into Asia so that it can gouge customers at home via an artificial shortage, via The Australian:

Australian LNG producers face a slump in export revenue amid indications a global supply glut may persist up to three years longer than anticipated, depressing prices and weakening company earnings.

…the market might not rebalance until the late 2020s.

“Asian spot prices will remain relatively weak over the coming years, with potential for subdued pricing to persist until the back-end of next decade,” Macquarie says.

…Adding to pressure, the mid- to long-term pricing “slope” formula used for long-term contracts in Asia has fallen to 11 per cent and as low as seven per cent for short-term deals compared with about 15 per cent in some existing contracts, Macquarie says.

The Asian gas price has crashed to $6Gj on spot $10Gj on contract. The latter will keep falling to meet the former, obviously enough, as cheaper short term contracts break longer oil-linked prices.

Australia’s east coast gas cartel is a part of this Asian oversupply so, in a very real sense, it is also now destroying west coast LNG profitability, given those producers rely heavily on contracts that are now breaking down.

And for what? The east coast cartel will never make enough money to pay for its capital costs. Breakevens on the east coast projects were up around $15Gj. So, they write down their losses and keep shipping to make a cash profit that is massively boosted owing to the artificial shortage and sky high prices created in gas supplied to their home market.

There is no end in sight for this total market failure. The Asian glut, which paid up sell side analysts say doesn’t exist, runs forever:

This exposes one final lie coming out of the gas cartel at the moment: that east coast gas reservation will destroy investment owing to “sovereign risk”. There is no investment coming to Australia. There are much cheaper LNG projects queued up in the US and worldwide for as far as the eye can see and even they will struggle amid the endless glut. And this assumes aggressive Chinese demand growth.

East coast gas reservation will not solve all of these problems. But it will help limit the damage.

Houses and Holes

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.

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