LNG Prices Rally

Energy

While the oil market has remained rather dull lately, the Asian LNG market has seen quite a bit more excitement, with prices having rallied significantly over the last week, and with the market now trading back above US$4/MMBtu. There have been reports of a slight pickup in demand, however, this does not justify the rally we have seen. Instead, we are seeing some supply concerns out of Australia. The restart of Gorgon’s train 2 has been pushed back to September, rather than July, with maintenance work taking longer than expected. Meanwhile, safety regulators have also ordered the inspection of trains 1 and 3, and it’s not yet fully known how these inspections will impact operations. Each of the three trains at Gorgon have a nameplate capacity of 5.2mtpa. It is questionable how sustainable the strength in the Asian market is, with stronger prices likely to lead to stronger spot inflows into the region once again.

Back to oil, and yesterday the EIA released its monthly Drilling Productivity Report, in which they forecast that US shale oil production will fall by 19MMbbls/d month-on-month in September to 7.56MMbbls/d. The number of drilled but uncompleted wells (DUCs) increased by 30 over July to a total of 7,685. In July, we continued to see a slowdown in drilling, and obviously in well completions, too. In the months ahead, given the lack of drilling activity, we would expect the industry to draw down DUC inventory in order to try to maintain output around current levels.

Finally, the API will release weekly inventory numbers later today. Expectations are that US crude oil inventories fell by around 2.85MMbbls over the last week. If we do see a drawdown, and if this is also confirmed by the EIA tomorrow, it will be the fourth consecutive week of declines in US crude oil inventories. As for products, expectations are that we will see draws of 1.2MMbbls and 1.3MMbbls in gasoline and distillate fuel oil, respectively.

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