PictureSource: GIIGNL, Capra Energy
LNG market analysts spend a great deal of time looking at new projects, prognosticating if and when they might reach a positive FID, and translating these expectations into outlooks for new LNG supply. We also do quite a bit of natural gas and LNG demand forecasting. We build projections based on top-down assumptions and analysis of economic growth, geopolitical trends and other macro considerations Or we work bottom-up to model the LNG demand implications of a wide range of market dynamics, such as coal versus gas competition, adoption of LNG within niche emerging markets (e.g., marine, trucking, etc.) and other more granular drivers.


 
 
PictureSource: Capra Energy
A general rule in energy risk management is that there exists an inverse relationship between contractual and operational flexibility, on the one hand, and financial modeling complexity, on the other. An LNG cargo position with different degrees of reload flexibility provides a good illustration of this principle.


 
 
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HIGHLIGHTS FOR MARCH 2015

Price level declines of -1.8% to -7.3% were observed across LNG markets (10-year strips).

The secular contango in the Northeast Asian, Mideast and Australian LNG markets steepened, with CAL 2024 finishing the month at a $2.76/mmbtu premium to CAL 2016 in NE Asia.

The NE Asia vs. US-Atlantic spread contracted by -$0.94/mmbtu (CAL 2016), while the Europe vs. Mideast premium firmed modestly.

Click here for the March 2015 edition of the LNG Forward Market Wire Monthly Report (complimentary issue).


 
 
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In addition to their basic terms (price formula, quantity, etc.), LNG sale and purchase agreements (SPAs) normally include other provisions that significantly affect such contracts' value and risk. Price reviews (i.e., "reopeners"), when present,  are typically among the most important of these. The main objective of price reviews is to protect the parties to an LNG SPA from the risk that the pricing agreed upon at signing will not reflect future LNG market conditions.


 
 
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DAILY REPORT HIGHLIGHTS

  • Fairly modest but uniform gains were observed across global LNG markets, with the front years exhibiting the most strength, and little change in the back years.

  • The Mideast LNG market led all others with the largest gains, advancing $0.12/mmbtu in CAL 2016; lower charter rates and bunker prices also contributed to firmer netback prices versus Northeast Asia.
  • European LNG closely tracked the Eastern markets, strengthening by +$0.11/mmbtu in CAL 2016, supported by gains in the European natural gas hubs, with smaller gains beyond.  Overall, intermarket spreads were little changed, as a result of the largely correlated moves across markets.

Please click here to open the 01/21/2015 LNG Forward Market Wire daily report (complimentary issue).

 
 
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For most arbitrage traders, market price volatility is a cherished friend. While this may be a well known observation, it is probably less obvious that inter-market correlation can be one of the arbitrage trader's worst enemies. This is equally applicable to LNG trading. The higher the correlation between two LNG markets, the less likely it is that the spread will move to a level that exceeds the freight costs involved in shipping a cargo between them, allowing traders to earn the difference.


 
 
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DAILY REPORT HIGHLIGHTS

• There were sharp declines in the most oil-price-sensitive markets (NE Asia, Mideast, Australia), pressured downward by a global crude oil market that is still searching for a bottom (prompt-month Brent broke below the $50/bbl level); the NE Asia 10-year strip was driven downward by an average of over -$0.20/mmbtu, for example.

US-Atlantic LNG forward prices also suffered steep declines, responding to severe weakness in US natural gas hub prices (Henry Hub balance-of-2015 prices contracted by almost -5%).

• European LNG was the only exception, firming slightly in the front years in response to steady European gas hub pricing and moderate US dollar weakness.

• NE Asia spreads to Europe contracted sharply as a result, with NE Asia moving to a slight discount to Europe in CAL 2016 for the first time; combined with more attractive netback spreads to major FOB suppliers, European reload opportunities to NE Asia will be severely limited at these price levels, and diversion economics to Europe will be much improved.

Please click here to open the 01/12/2015 LNG Forward Market Wire daily report (complimentary issue).

 
 
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Highlights for December 2014

Price levels: Declines from -2.8% to -8.7% observed in the 10-year strip across LNG markets.

Term structure: Contango in the Northeast Asian, Mideast and Australian LNG markets continued to steepen, with CAL 2024 now at a $2.42 premium to CAL 2016 in Northeast Asia.

The theme of global LNG market convergence continued, severely limiting reload arbitrage opportunities from Europe to NE Asia, and further closing the long-term structural arbitrage between the US-Atlantic and NE Asia.

Click here for the December 2014 edition of the LNG Forward Market Wire Monthly Report (complimentary issue).


 
 
 
 
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The typical LNG marketing and trading portfolio will contain some of the simplest and some of the most complex derivative structures encountered in energy finance. Some of the more commonly found structures are physical forwards, basis spread options and best-of spread options, but longer-term transactions like SPAs will often contain an even wider array of embedded exotic features. In this post, we provide an example of one of the simpler derivative structures, and demonstrate how it is valued.