Wall Street vs. the Wonks. Future trends not rosy for LNG?

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Today’s Key Takeaways:  Stability needed to get energy companies to expand production. Offset high gas prices by investing in an oil company. Not everyone in Alaska is bullish on AK LNG. Wonks and Wall Street argue over lithium. Biden considering reversal of some Trump tariffs with China.


From the Washington Examiner, Daily on Energy:

WHAT IT WOULD TAKE TO GET ENERGY COMPANIES TO EXPAND PRODUCTION: Oil prices have been above $120 per barrel for consecutive days, prompt month natural gas futures have been trading above $8 per MMBtu for weeks, and Treasury Secretary Janet Yellen’s two cents are that gasoline prices aren’t going to fall “anytime soon.”

For a number of independent producers, the run-up in prices hasn’t been enough to tempt them to spend on increasing production. Will the sum of it now be enough?

Capital discipline: Producers have been publicly beating the “capital discipline” drum for months, preferring to put healthy earnings toward buying back stock, returning cash to shareholders, and paying down debts, rather than racing to increase production and risk overexposing themselves if prices drop considerably.

While industry executives have named inflation, labor shortages, and difficulties accessing capital as factors contributing to their conservative spending strategies, large independents have drawn up differing risk calculations related to the war and demand than some of their integrated competitors, including Chevron and ExxonMobil, which have announced plans to increase production.

“We do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels until multiple quarters from today given the uncertainty and volatility currently in the market,” Diamondback Energy said in its first-quarter earnings announcement, which was made public on May 2.

Increasing spending activity today “would result in capital efficiency degradation and would not meaningfully contribute to the global supply and demand imbalance in the oil market today,” the company said.

Others, including Devon Energy and Occidental Petroleum, have made similar overtures, and declined to increase production targets.

War as a constant: Even if the war were to end in short order, its consequences for the oil and natural gas markets are to remain due to already imposed and planned embargoes of Russian petroleum, and due to Europe’s intentions to displace Russian pipeline gas with LNG imports from the U.S. and other friends.

The Energy Information Administration forecasts Russia’s liquids fuel production to fall by around 2 million barrels per day in the fourth quarter of the year, compared to the first quarter.

The pressure is on: The industry is, and has been since the war started, under pressure already from President Joe Biden and Democrats in Congress to get their production levels up, as they’re accused of exploiting the war’s effect on oil prices to get richer.

To be sure, not all companies are all taking the exact same course. Biden singled out Exxon on Friday and urged the company to “start investing” to increase production.

An Exxon spokesperson stressed in response that the company plans to increase production by 25% this year in the Permian Basin, telling Jeremy the company has “been in regular contact with the administration, informing them of our planned investments to increase production and expand refining capacity in the United States.”

Chevron is also planning to increase production this year and committed to increase capital spending by over 60% compared to 2021, chairman and CEO Mike Wirth told the House Energy and Commerce Committee’s Subcommittee on Oversight in April.


Want To Offset High Gas Prices? Invest In An Oil Company
Robert Rapier, OilPrice.Com, June 13, 2022

  • As the price of gasoline rises, the price of oil stocks has risen alongside it.
  • The oil business is an incredibly tough one, but if you are willing to suffer through the lows then you can enjoy the highs.
  • Technically, if a consumer had bought certain oil stocks, then the rising price of gasoline could well have been offset by those profits.

We all know that gasoline and diesel prices are higher than they have ever been. At the same time, oil companies are reporting record profits. It’s completely understandable why the public would be outraged by this. If my cable bill doubled — and I saw that my cable company was making record profits — I would be outraged as well.

The thing is, oil isn’t priced like cable, or like iPhones, for that matter. The cable company decides how much they are going to charge. Believe it or not, that’s not how oil and gas are priced.

Chevron executives don’t sit around a boardroom and decide how much they are going to charge for oil. Those prices are set in a market, much like the stock market. The fact is, Chevron doesn’t know where oil prices will be in the future. They try to forecast that, and then they plan based on those forecasts.

Sometimes they are wrong, and you will see them lose lots of money. For example, “Big Oil” lost $76 billion when oil prices plunged in 2020. They also lost a lot of money in 2014 and 2015 when OPEC flooded the market with oil.

Think about it. If oil companies set prices based on costs — or on how much money they want to make — do you think oil prices would ever be negative? Do you think they would ever lose money? How often do you hear about Apple or your cable company losing money? They don’t because they control their pricing.

Just this week, someone said to me “I wish my paycheck would rise like these gas prices.” I advised him the same way I advise many people who express this sentiment. It can. Just buy shares in an oil company.

Let’s look at some numbers. Over the past six months, the average retail price of gasoline has risen from $2.12 a gallon to $4.62 a gallon (Source). The average family uses about 1,100 gallons of gasoline a year. That means that annualized fuel costs have risen by $2,750 for the average family in just six months.

That’s a significant amount of money for most people. It consumes discretionary income, and at the same time enriches the oil companies.

But let’s say that six months ago we wanted to hedge against this risk and bought some shares of Chevron. At that time, Chevron’s shares were trading at $116. Today they are 53% higher at $178. Each share of Chevron appreciated by $62, which means if you had owned 44 shares, the gain over the past six months would have equaled the increase in this year’s fuel costs.

Those shares would have also paid you $125 in dividends during that time — enough for a couple of tanks of gasoline.

Of course, there are two big caveats. Those 44 shares would have cost you $5,100 six months ago. Not everyone has that kind of money available to invest.

The other big caveat is that oil company shares fall when the price of oil goes down. At one point in 2020, Chevron’s shares had fallen by over 50%. That’s the risk in hedging. Yes, you can tie your paycheck — in a way — to the rise and fall of oil prices. But it’s a double-edged sword that doesn’t always cut in the right direction.

I should add that this isn’t the only way to hedge against higher fuel prices. You can always switch to an electric vehicle and walk or bike as often as you can.

But there’s one thing you would learn if you did invest in an oil company. It’s a tough business. Times are good for them right now, but sometimes they are very, very bad.


Future trends not all rosy for LNG sellers and developers
Larry Persily, Alaska Journal of Commerce, June 13, 202

Liquefied natural gas is in short supply, the tight market is expected to continue for two or three more years, and new Russian LNG production planned to come online during that time could be delayed by Western sanctions.

It’s all driving up prices, while more buyers are signing contracts to lock in supplies.

That’s good news for sellers and export project developers.

The market is so tight that global demand is forecast to exceed supply by 26 million tonnes this year — the equivalent of two good-sized LNG export projects — Oslo-based research firm Rystad Energy reported last month.

But a lot more supply is on the way for the mid- and late 2020s. However, construction costs for those new export terminals are rising, adding stress to investment decisions. Meanwhile, competition is fierce for the long-term sales contracts that suppliers need to underpin multibillion-dollar project financing. All not such good news for LNG project developers.

Adding to the downside, a trio of market analysis firms expect China’s LNG imports to fall by as much as 19% this year from 2021, the first sizable drop since the country started buying the fuel in 2006. The forecast was attributed last month to U.S.-based S&P Global Commodity Insights, U.K.-based Wood Mackenzie and SIA Energy, a Beijing-based oil and gas consulting business.

That’s particularly glum news for LNG project developers, such as Alaska, looking to sell into what some had predicted would be a never-ending growth market.

China’s import volumes for the first four months of the year already are down 18% from a year ago, according to data from Refinitiv, a U.S./U.K.-based market data provider.

COVID-19 lockdowns have cut deeply into China’s industrial demand for the fuel. In addition, an increase in domestic gas production and higher volumes of pipeline gas imports from Russia, along with a softening economy, appear to be weakening China’s demand for LNG imports in the longer term.

“I think demand destruction has become a major concern,” particularly at high prices for imported gas, said Jason Feer, global head of business intelligence at Poten & Partners, an international advisory firm on oil, gas, and shipping markets.

“We believe that a lot of the Chinese demand that has been lost this year has been lost permanently,” Feer said in a May 25 webinar.

The Chinese government is focused on dialing back energy costs amid a weaker economy, which is providing a boost to coal and a hit to gas imports, according to Lu Xiao, an analyst at S&P Global Commodity Insights, as reported by Reuters on May 26.

China’s imports of pipeline gas from Russia, through the Power of Siberia line, continue to grow after the pipeline started operations in 2019, with full capacity of more than 3.6 billion cubic feet per day planned by 2025. That would equal more than 10% of China’s total gas consumption last year.

Domestic gas consumption in China is up more than 6% in the first four months of the year, to about double what it was 10 years ago.

Even if China disappoints on LNG imports growth, increasing demand from European nations will help project developers, as Europe pulls away from Russian gas supplies and builds new LNG import terminals to source their gas from overseas suppliers. But even that presents a challenge for developers. European customers tend to favor shorter-term contracts than the traditional 20-year deals in Asia.

For example, Germany, which has no LNG import facilities but is rushing ahead with $3 billion in government assistance to lease four floating receiving and storage units, is reluctant to sign the 20-year supply contracts that QatarEnergy is offering.

The same hesitancy exists across Europe, particularly as utilities work toward the European Union’s goals to reduce greenhouse gas emissions from fossil fuels and transition to more renewables.

“Utilities are not convinced that they will be able to sell LNG in Europe 20 years from now,” Feer said, calling long-term gas supply contracts “a huge liability to put on the books.”

“A handful of European buyers are only willing to commit to 10 years, while QatarEnergy prefers a contract duration of at least 15 or 20 years,” Poten & Partners reported in a recent world markets newsletter.

Another disagreement is over the price index for LNG contracts. Qatar prefers to sell LNG linked to the cost of a barrel of crude oil, which is the traditional index on long-term sales to Japan and other Asia buyers. European customers prefer a rate tied to benchmark natural gas prices on the continent.

It’s a future guessing game as to which is a better deal for suppliers and buyers.

European gas prices crashed to a record low of $1.20 per million Btu in May 2020, at the worst of COVID’s demand destruction, but accelerated to record highs in the $50s this past winter for spot-market LNG sales. Oil-linked pricing on long-term LNG contracts has held within a much narrower band, generally $6 to $13 in the past couple of years.

Qatar, which vies with the United States and Australia for the title of world’s largest LNG producer, is undertaking a $30 billion capacity expansion project to boost production by 40%. The increased output is scheduled to start ramping up in 2026.

A second phase, at an additional $20 billion, could add even more liquefaction and export capacity, raising Qatar’s nameplate production to 126 million tonnes per year, about 25% above current U.S. LNG output.

U.S. developers, however, are not resting after moving the nation from zero LNG exports in January 2016 to take over the world’s top spot this spring.

A couple more export facilities are under construction on the U.S. Gulf Coast, both expected to start operations by late 2024 or early 2025, bringing to nine the number of terminals on the Gulf and Atlantic coasts. More capacity is expected to follow as at least two more ventures are moving toward final investment decisions and several existing terminals are looking at possible expansions.

One problem, however, is rising costs for labor, equipment and the expensive production modules that go into building LNG facilities.

“U.S. projects are facing significantly higher costs,” Feer said in the webinar.

Reuters reported a month ago that materials prices have shot up 20% in the past two years while gas compressors are 30% more expensive. That means developers either will have to pass on higher costs to buyers, accept lower rates of return on their investments, or find contractors willing to absorb the risk of construction cost escalation.

“The race to the bottom (for liquefaction costs) in the U.S. is really winding down,” Feer said. While in the past couple of years some developers were offering to accept contracts to liquefy gas at $1.80 to $1.90 per million Btu (plus the price of feed gas), higher construction, capital and financing costs are driving the liquefaction rates up over $2, “sometimes significantly so,” he said.


Red-hot lithium boom pits Wall Street against the wonks
Mark Burton, Annie Lee, Bloomberg News, June 13, 2022

There’s a fight brewing in the lithium market, after a controversial forecast from Goldman Sachs Group analysts set off a backlash among some of the industry’s most prominent experts.

Lithium is a vital component of electric-vehicle batteries, which means the outlook for supply, demand and pricing is increasingly consequential. For years, a small group of niche consultants has dominated the conversation in a commodity that some say will become as important as oil in the coming century. Now, with prices surging and demand booming, they’re increasingly sharing the stage with Wall Street titans like Goldman.

Read More: Benchmark: Here’s what Goldman got wrong about lithium prices

The bank made headlines when it warned that a searing rally in lithium will go into reverse this year as supply from unconventional new sources overwhelms demand. Credit Suisse Group AG also joined in predicting a correction. But specialists including London-based Benchmark Mineral Intelligence are loudly pushing back.

The rift matters because both groups play important roles in the burgeoning electric-vehicle industry. The niche consultancies offer tailored research to miners, battery-makers and car companies that guides decisions about whether to invest in new projects; Wall Street banks — and the investors that read their research — help determine whether they can afford to do so.

Benchmark disputes Goldman’s forecast that a flood of new production is on its way, and that prices will crater as a result. The consultancy still sees prices retreating from recent sky-high levels but takes a more pessimistic view on the scale and timing of new supply. The mining industry is famously bad at hitting its production targets and lithium has added risks to due to the highly complex technical processes involved in making the final products used in battery packs, Benchmark says.

“You’ve got this additional hurdle arising because it’s not a commodity, it’s a specialty chemical,” Daisy Jennings-Gray, a senior price analyst at Benchmark, said by phone. “It’s a two-stage concern combining the traditional problems that the mining industry has faced with the additional challenges that a specialty chemical producer might face.”

The spat may seem trivial, but the stakes are high for those who rely on the forecasts, given lithium’s critical role in the electric-vehicle revolution and the wider fight against climate change.

If the deficits persist and prices spike further, it could cause carmakers’ margins to collapse, and potentially slow the mass roll-out of electric vehicles. But if prices slump, miners could scrap major new projects, setting the stage for even larger spikes and deeper deficits in the 2030s, when sales of electric vehicles will need to outstrip those of conventional cars if the industry is going to have a hope of hitting its net-zero targets. 

“The lithium industry in its current form is very young, and so it’s difficult to say with confidence how responsive miners will be in bringing on new supply,” said Peter Hannah, a senior price development manager at Fastmarkets, a price reporting agency and industry consultancy. “A lot of it hinges on technology that we’ve never really seen before, and so there a lot of variables to consider, and each one could prove each of us wildly wrong, one way or another.”

Of course, disagreement among analysts is common in commodities markets, but the scale of the divergence is particularly acute in battery metals like lithium, where supply and demand are both growing at a breakneck pace. While a market like copper typically grows by 2%-4% a year, lithium analysts are anticipating growth of more than 20% for both supply and demand between 2021 and 2025. 

Calculating error

That means minor differences in analysts’ assumptions — for example about the chemical composition of batteries or the timing of new mining expansions — can have a major impact on their supply-and-demand estimates. It’s an issue that’s cropping up in other battery metals like cobalt and nickel as well.

George Heppel, who developed models for battery metals demand at commodities consultancy CRU Group before joining BASF SE earlier this year, said in a LinkedIn post last month that a minor error in calculating nickel demand meant forecasts underestimated usage by about 30%. And others in the industry were doing the same.

“Several months after fixing my model, I was having lunch with a nickel analyst at an investment bank who was angrily complaining about how the nickel demand numbers being generated by the bank’s battery division were far too low. It was with much satisfaction that I was able to reveal the likely issue,” Heppel wrote.

In lithium, expert consultancies claim that the wayfarers from Wall Street are far more likely to overlook the nuances of the industry in carrying out their research. Joe Lowry, the founder of specialist advisory firm Global Lithium, has frequently taken to Twitter to call out perceived shortcomings in research by banks.

Matt Fernley, the London-based managing director at Battery Materials Review, an industry researcher, said the sellside reports are “massively over-estimating” the ease of adding new supply, and failing to consider the complexity of bringing new assets into production and the qualification requirements.

“The lithium industry needs to raise hundreds of billions of dollars of capital for expansion over the next 10-15 years,” he said. “A lot of that needs to come from equity and that’s going to be difficult if equity prices are depressed because of such reports.”


Scoop: Biden leans toward easing some of Trump’s China tariffs
Hans Nichols, Axios, June 14, 2022

resident Biden, in an Oval Office meeting last week with key members of his Cabinet, indicated he’s leaning toward removing some products from the Trump administration’s China tariffs list, people familiar with the matter tell Axios.

Why it matters: With inflation at a 40-year high of 8.6%, Biden and his top officials are desperate to show action on bringing down prices, even if it makes them appear weak on China.

  • Inflation is eating into the purchasing power of lower-income Americans — and eroding Democrats’ political fortunes ahead of midterm elections. While the Federal Reserve is the nation’s primary inflation firefighter, the tariffs that now cover $350 billion of goods imported from China are one area where Biden can act unilaterally to relieve American consumers.
  • But Biden’s plans to exempt some products covered by Trump’s Section 301 tariffs risk aggravating the labor movement.
  • Driving the news: Biden is scheduled to address the AFL-CIO’s Constitutional Convention in Philadelphia today, with remarks aimed at celebrating their partnership.
  • But in private conversations with administration officials, labor representatives have warned the White House against relaxing any of the tariffs.

What we’re hearing: Biden is leaning toward ordering the Office of the U.S. Trade Representative to run a formal “exclusions process” to determine if some consumer items, such as bicycles, should be exempted from the Section 301 tariffs. He is less likely to include big industrial items, like steel and aluminum, in the process.

  • Biden gave some indication of that thinking last Tuesday in a meeting with key Cabinet officials, according to people familiar with the discussions.
  • A potential announcement is expected as early as this month.
  • “No decision has been made,” said a White House spokesperson. “The President is discussing with his team on ensuring that tariffs are aligned with our economic and strategic priorities, such as safeguarding the interests of workers and critical industries, advancing our national security, and not unnecessarily raising costs on Americans.”

The big picture: The Labor movement put Biden on political notice last week that they expect him to keep all of Trump’s tariffs in place, writing that “our government must act in the national interest to strengthen our economy for the future.”

  • For most of his presidency, Biden has been reluctant to let any daylight enter between him and the labor movement, which forms the backbone of his political coalition.
  • The extent of union anger likely depends on how many items Biden exempts and the total dollar amount.
  • Some labor officials were frustrated by Biden’s decision last week to use his emergency powers to waive any potential trade penalties for solar developers for importing panels from southeast Asia.

Between the lines: The overall impact of removing all of Trump’s tariffs on imports from China, according to one study, might lower the Consumer Price Index (CPI) by only 0.26 percentage point.

  • That’s fueled a fierce internal debate, pitting economic officials against other key members of the administration, like USTR Katherine Tai, who want to maintain leverage on China.

Flashback: For several months officials have privately debated the political and economic merits of lifting some of the Trump tariffs, with Biden telling reporters in Japan in late May that he was “considering” rolling some of them back.

  • “We did not impose any of those tariffs,” he said. “They were imposed by the previous administration, and they are under consideration.”

The bottom line: White House officials are depressed about and resigned to their prospects of meaningfully lowering prices before November. Biden is deeply frustrated with his team’s proposed addresses to sky-high gas prices.

  • He recently questioned the value of heading to Iowa to promote biofuels to help lower gas prices, as the Washington Post reported, summoning his chief of staff, Ron Klain into the Oval Office.