Qatar crisis to make LNG cheaper

▶ A supply glut is growing and gives buyers leverage

Everyone loves a good deal. Japan and India are no exception. They’re banking on Qatari gas being the next big ticket item on the sales rack.

Qatar supplies about a third of the world’s liquefied natural gas (LNG), which can be used for electricity generation as well as alternative transportation fuel. However, the country’s isolation as a result of the political crisis with its Arab neighbors and new competition threatens the price of the resource.

There is ample supply of LNG in the market today, with the glut already impacting prices and traditional business models. The International Energy Agency (IEA) said that LNG is also creating new competition with pipeline gas supplies, which could benefit consumers.

“The rising number of LNG consuming countries from 15 in 2005 to 39 this year, shows that LNG attracts many new customers, especially in the emerging world,” said Fatih Birol, the IEA’s executive director. “However, whether these countries remain long-term consumers or opportunistic buyers will depend on price competition.”

It appears that Japan and India are taking notice of the market dynamics, leveraging to drive down prices

The energy watchdog said that while US domestic demand for gas was growing as a result of higher consumption rates from the industrial sector, more than half of the production increase will be used for LNG for export. The IEA forecasts that the US will be within reach to challenge the world’s largest LNG exporters, Qatar and Australia, over the next five years.

It is similar to the situation with oil. US shale producers hit a tipping point surpassing production estimates which threw the market into a tailspin, forcing oil prices down.

Just like the items on sale at a local shop: either the store needs the space or there is oversupply that needs to quickly find a home. And the prices are in the buyer’s favour.

It appears that Japan and India are taking notice of the market dynamics, leveraging to drive down prices for cheaper LNG. More than 66 per cent of Qatar’s 106.3 billion cubic metres (bcm) of exported LNG heads to Asia led by Japan and India, according to data from UK-based Oxford Institute for Energy Studies.

If there is further pressure on LNG prices with new supplies coming onto the market, that poses a salient question. Is it really the right time for Qatar to spend in order to increase its production?