Bottom Line: Fesharaki expects the LNG market to remain tight on CY 21-25E by keeping the Spot LNG price on the rise, but prices could still moderate to $ 12-13 / mmbtu from the abnormally high level currently high of $ 18 / mmbtu, as the heatwave in Asia subsides and the European stock is rebuilt. Our analysis suggests that GUJGA’s recent price hikes are baking in Spot LNG by around $ 12 / mmbtu, suggesting that a further price hike is needed if Spot LNG holds at current levels. Maintain “buy”.
Rise in spot LNG prices due to conversion of coal to gas and limited supply of LNG: spot LNG increased sharply to around $ 18 / mmbtu due to higher carbon prices driving the conversion coal to gas in Europe, while the supply of LNG has also been limited. The current spot price of LNG is equivalent to a gross> $ 100 / bbl.
Asian LNG prices are expected to moderate from recent highs, but are highly unlikely to fall below USD 12-13 / mmbtu: Fesharaki still expects low levels of storage in Europe at the approaching winter. Gazprom also does not use the capacity to transport gas through Ukraine. Higher carbon prices support the European gas market, as gas prices can be high while outperforming coal. Fesharaki, however, expects some price pullback to $ 12-13 / mmbtu as the heat wave in Asia wears off and stocks in Europe rebuild.
Higher LNG spot prices do not need to lead to new projects: the peak of LNG Spot does not need to translate into new future projects since> 75% of the LNG market is still indexed to oil. Fesharaki is broadly in favor of oil price indexation as it prevents extreme price movements as oil indexation allows him to indirectly benefit from OPEC stability.
The LNG market can be split into four phases and a tight market is expected: 2019-20: Long LNG market (strong supply). 2021-25: Tense LNG market (strong demand but lack of FID 2016-17 and construction delays cause supply to dry up). 2026-28: oversupplied LNG market (projects with FID in 2018-19 hit the market leading to oversupply driven by expansions in Qatar and other new projects). From 2029: Tight LNG market (new FIDs needed to close the supply / demand gap)
Spot LNG exposure decreased for GUJGA but remains high: while the new dom HPHT gas contracts (0.7 mmscmd RIL and 1.3 mmscmd Vedanta) have contributed to reducing the Spot LNG exposure, we estimate that Spot LNG will contribute approximately 50% of the industrial gas supply under a normal demand scenario.
The recent price hike taken by GUJGA appears to be at ~ $ 12 / mmbtu Spot LNG – Further hike is needed at current levels: Our analysis suggests that the recent 12% price hike taken by GUJGA amounts to 11, Spot LNG $ 5-12.5 / mmbtu. This would be sufficient if Spot LNG moderates to $ 12-13 / mmbtu over the next few months (as predicted by Fesharaki). But the LNG market remains tight over 2021-25 in his opinion and if Spot LNG holds close to $ 15 / mmbtu (currently $ 18 / mmbtu), we believe a further price hike of Rs 3-4 / scm might be required by GUJGA.
GUJGA’s pricing power reassures us about steady-state margins; Maintain “buy”: limited competition and the likely 15% price hike that Morbi customers are expected to experience.