GLOBAL LNG：BOOM BUST AND BOOM AGAIN
Writing in early October we commented that against a backcloth of strong 10% plus LNG demand growth basin price differentials were blowing out. Three months on and markets have proven even tighter than anticipated, the obvious implication being that Shell and to a lesser extent Total should see good income in Q4 '17 and Q1'18. Looking forward our view remains that now emerging supply will pressure spot prices through 2020. Yet with European growth healthy, China booming and limited investment decisions since 2014 our analysis says the period of excess is rapidly shortening thereby positioning the contract price cycle for upward momentum. Buy exposure. Buy Shell.
The charts paint a near and long term picture
Ok, we are talking gas markets. Demand is both price sensitive and difficult to predict. But the charts paint an obvious near and longer term picture. Gas demand has been strong, price has rallied strongly and medium term market length is coming in. The consequence?A potential near term windfall for the major LNG marketers （read Shell and to a lesser extent Total） and a much better outlook for supply/demand balance. All told, a global gas market that looked at risk of oversupply post 2023 now looks positioned for 2022 deficit.
Buyers need to start to contract but executing project will be challenging
Of course soft pricing, not least at a time of growing pollution and climate concerns has had much to do with the improving outlook. There is also the little matter of continued excess over the 2018-21 years to deal with; LNG is not out of the woods yet. As oil prices firm and oil-linked gas prices rise with it demand growth must also be expected to dampen. Yet either way, given limited new LNG project decisions since ’14, a five year build time argues investment decisions now need be taken. Difficult in a market where costs remain elevated, term length has shortened and demand has fragmented.
Valuation & Risk （for details please see p12）
So what should we think? Combine buyer scramble across this second winter season with Chinese growth and shortening length, and buyers will in our view accept the greater need to incentivize. Projects’ may be multiple, but financing and executing them is not. Portfolio, balance sheet and market reach will be key. Shell’s purchase of BG, Total’s plan for Engie are set to show their virtues.
□ .L.u.c.a.s. .H.e.r.r.m.a.n.n./.D.a.v.i.d. .M.i.r.z.a.i .德.意.志.银.行.股.份.有.限.公.司