Unlike crude oil, LNG takes Gulf tensions in its stride
The subdued reaction of global liquefied natural gas (LNG) prices to the latest tensions around the Persian Gulf not only stands in contrast to the excitable crude oil market, but perhaps offers a more reasonable assessment of the risks.
While spot prices for LNG did move somewhat higher in the wake of the attacks on two tankers in the nearby Gulf of Oman on June 13, the reaction wasn’t as pronounced as the spike in global oil benchmark Brent.
In some ways this could be viewed as surprising as LNG is actually more exposed to the threat of closure of the Strait of Hormuz, the narrow sea lane that links the Persian and Oman gulfs.
About 26% of all LNG transited the Strait of Hormuz in 2018, the vast majority from Qatar, which is now the world’s second-largest producer of the super-chilled fuel behind Australia.
For crude oil, the figure is less than 20% of global demand, with about 17.4 million barrels per day (bpd) going through the Strait out of world consumption of around 100 million bpd.
The attacks on two oil product tankers were blamed on Iran by the United States and some of its Gulf allies, the subsequent rise in tensions has already resulted in Iran shooting down a U.S. drone and U.S. President Donald Trump cancelling a retaliatory strike minutes before it was due to be carried out.
The June 13 attacks sent crude prices up, with Brent rising 3.6% on the day, and extending the gains since to end at $66.49 a barrel on Wednesday, up 11% from the day before the incidents.
In contrast LNG has been far more subdued, with Singapore Exchange contracts rising from $4.10 per million British thermal units (mmBtu) the day before the attacks to $4.37 the day after, a gain of 6.6%.
But since that spike, the price has slipped back to $4.34 per mmBtu.
The weekly assessment for LNG delivered to China LNG-AS lifted from $4.25 per mmBtu the week prior to the attacks to $4.60 in the week to June 21, a rise of 8.2%.
Of course, the tensions in the Middle East aren’t the only factors influencing crude and LNG prices, with trade tensions between the United States and China, and a slowing global growth outlook also playing a role.
However, it’s worth noting that spot LNG prices usually start to rise around this time as utilities in North Asia restock ahead of peak summer power demand.
Another possible explanation for LNG’s more relaxed reaction is that Qatar sells very little of its output on the spot market, meaning that traders saw little threat to immediate supplies.
However, if the LNG market was genuinely worried about the Strait being blocked, the spot price would surely be considerably higher to reflect the risk premium associated with the potential loss of a quarter of global supplies.
The paper-traded market for LNG is also considerably smaller than that for crude oil, and is used predominantly by professionals already deeply engaged in LNG.
This means that it is less subject to the influence of speculators and “hot money” investors who chase news headlines for short-term gains.
While LNG traders are aware of the risks surrounding an escalation of conflict around the Strait, they are also aware that as the situation stands right now, the chances of the vital passage being blocked are small.
Even the so-called tanker war of the late 1980s didn’t result in the Strait being closed, even though it was mined by Iran and there was military conflict between the U.S. and Iranian navies. An Iranian civilian airliner was also downed by a U.S. missile, killing 290 people.
It would probably take a serious escalation from the current tensions before the LNG market would start to price in a realistic chance of the Strait being blocked.
However, the more volatile crude market is likely to react far more quickly to developments, even if these don’t actually do much to the overall chances of the loss of shipments through the Strait.
Source: Reuters (Editing by Richard Pullin)