LNG typically needs oil above $80 a barrel to be profitable($12+ MMBtu). Could be awhile before we see oil at $80+ levels. LNG has been fetching closer to $8 MMBtu and could fall as low as $6 MMBtu before we see the end of this slump. LNG profits from the spread between domestic prices and foreign prices. Ex: the difference between henry hub and Asia. Oil should come back up eventually.
But then US natural gas prices should come back up eventually as well. EIA is projecting rising US natural gas prices from now until 2040. We have seen the US natural gas drilling rig count drop from around 1000 to 200. We are just about at the point were declines from existing wells have caught up with new gas coming online and overall US natural gas production will start to fall.
Impact of Falling Oil Prices on LNGWhen Brent crude sells for $100, oil-linked natural gas contracts typically translate to around $14 MMBtu, giving U.S. LNG a big price advantage. This advantage disappears as crude prices fall, with crude at $60 LNG indexes to $8.40 per MMBtu. U.S. LNG producers have been targeting prices of $11 or $12 per MMBtu to be profitable after absorbing the costs of buying the gas, liquefying it, shipping it around the globe and regasifying it. When crude oil prices dropped below $80 per barrel, LNG from the US became less competitive in Asia compared to plentiful gas from Australia and Qatar. Many countries have entered the LNG export trade in the last decade, contributing to a crowded market.
Asian LNG price faces steep fallAsian liquefied natural gas (LNG) prices could fall a further 25 percent in coming months as new supply, falling demand and weaker oil prices put it on par with iron ore and coal as the worst performing commodity of recent years.
Asia's LNG market has already fared worse than slumping oil markets, with spot prices LNG-AS down 60 percent since 2014 to $8 per million British thermal units (mmBtu), ending half a decade of high prices. Australia's biggest energy firm, Woodside Petroleum, in August reported a 40 percent slide in first-half profits and said it expected LNG prices to remain low into 2016. Ratings agency Moody's said on Monday it expected Woodside's credit metrics "to deteriorate substantially from its previously very strong levels." LNG prices look to have further to fall. Analysts and traders said Asian LNG prices could fall to $6 per mmBtu, representing a 70 percent price drop since 2014 and putting it in the same league as coal and iron ore.
EIA expects near-term decline in natural gas production in major shale regionsNatural gas production across all major shale regions in EIA's Drilling Productivity Report (DPR) is projected to decrease for the first time in September. Production from these seven shale regions reached a high in May at 45.6 billion cubic feet per day (Bcf/d) and is expected to decline to 44.9 Bcf/d in September. In each region, production from new wells is not large enough to offset production declines from existing, legacy wells. As rig counts fall, increases in rig productivity are necessary not only to compensate for the reduced rig total, but also for rising levels of legacy-well declines. Given the substantial drop in rig counts since the fourth quarter of 2014 in each of the DPR regions and growing declines in production from legacy wells, productivity increases are less able to completely offset lower rig counts and legacy-well declines.