January 15, 2025 • 24 mins
This could be a challenging year for natural gas. Market dynamics are in flux, and how buyers and sellers react to the changes will make the year ahead a ‘stress test’ for the fuel and how the sector positions itself for the future. On the supply front, a rapidly shifting geopolitical landscape has had a massive bearing on the trade flows of pipeline gas and LNG. In terms of demand, heat waves and extreme weather events have inverted seasonal consumption trends. So what can we expect from 2025? On today’s show, Tom Rowlands-Rees is joined by Fauziah Marzuki, BloombergNEF’s Global Head of Gas Markets, to discuss findings from her recent report “Gas Things to Watch in 2025: Crunch Time Before Comeback”.
Complementary BNEF research on the trends driving the transition to a lower-carbon economy can be found at BNEF<GO> on the Bloomberg Terminal or on bnef.com
Links to research notes from this episode:
Gas Things to Watch in 2025: Crunch Time Before Comeback - https://www.bnef.com/insights/35571/view
See omnystudio.com/listener for privacy information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
This is Tom Rowlands Reis and you're listening to Switched
on the BNF podcast. At the beginning of every year,
BNF analysts release their series of Things to Watch notes,
laying out their predictions and insights for the year ahead.
Today we turn to our gas team and take a
look at the predictions of what is one of our
most in demand commodities. Since the Russian invasion of Ukraine
in twenty twenty two, the gas sector has experienced extreme
(00:21):
swings in pricing and the complete re routing of some
trade flows. The drama isn't over yet. Our analysts foresee
further turbulence ahead and have DUG twenty twenty five a
stress test for gas in terms of supply. The world's
largest exporter of energy, the US, may look to explore
even more under the incoming Trump administration. While the final
gas pipeline from Russian to the EU has now been
(00:42):
turned off for demand, what was traditionally a winter fuel
is now being burned through summer months as countries seek
additional power generation to cope with rising temperatures and away
from the buying and selling of the commodity itself. Services
sectors are also feeding the pressure with an over supply
of ships hitting the seas to guide us through some
of the things on the horizon for the global gas market. Today,
I'm joined by Fausia Marzuki, Bloomberg and yf's global head
(01:05):
of Gas Markets. Together we discuss findings from her team's
report Gas Things to Watch in twenty twenty five crunch
time before comeback, which BNF clients can find a BNF
go on the Bloomberg Terminal or BNIF dot com. Now
to the show and what to expect from gas during
the year ahead. Thank you for joining us today, faus
(01:32):
on the podcast, Let's talk about gas.
Speaker 2 (01:35):
Who thanks for having me.
Speaker 3 (01:36):
Tom.
Speaker 1 (01:37):
Last time you're on the show, one of the things
you talked about was how weather cycles are and extreme
weather events and on top of that are impacting the
price dynamics of coal.
Speaker 4 (01:47):
We're talking about a report that you published with our
colleague you me Kim.
Speaker 1 (01:50):
But now we're talking about gas, which is your your
your day job now leading our analysis globally on gas.
So how is weather impacting gas demand in twenty twenty
five and are changing climate patterns likely to have an impact?
Speaker 2 (02:03):
So it's really interesting the fundamentals of the gas market
were very much built around is going to be a
cold winter and we're storing gas to meet the winter.
So gas traders and the gas market would really only
just look at the Northern Hemisphere winter season. But now
with changing climate patterns, increasingly gas traders need to be
worried about heat waves, they need to be worried about
(02:25):
rainfall and drought. So it's coming to a point where
actually the summers are becoming more interesting or actually perhaps
even a lot more difficult to predict with regards to
how that's actually going to be influencing the gas market. Now.
Summer is in particular because that's when you're supposed to
be injecting gas into storage to save it for the winter.
But what we've seen some really interesting flips in the
(02:48):
market that in Europe the benchmark price there, the summer
prices are actually more expensive than winter. Now, it's just
markets have gone completely convoluted. To us at the next step,
and it is because of changing weather patterns.
Speaker 1 (03:02):
I'm going to speak on behalf of maybe some of
our listeners who are less familiar with gas but are
interested in getting interested in it. So you mentioned a
few things. I mean, one is, you know, gas injections.
I'm just going to tell everyone now, having kind of
been adjacent to gas for arth, that's gas industry speak
for putting gas into storage for later. And then they's
the what's the word when you take it out? What's
(03:23):
the opposite of an injection withdrawal?
Speaker 4 (03:25):
An injection and a withdrawal.
Speaker 1 (03:27):
It sounds like something much worse because they have an
injection and withdrawal cycle, but that is what the gas
market works on. So putting into storage for taking out later.
And you mentioned cold winters, they watch that and it's
I think that's fairly intuitive why that matters because people
burn gas to keep warm. But why do the hot
summers have an impact and why does drought have an
(03:47):
impact on the gas market?
Speaker 2 (03:49):
Excellent question. So when it's hot, you need a lot
of air conditioning, and that air conditioning is very much
powered by gas power generation, especially in a lot of
the big gas economies like the US, places in Southeast
Asia and parts of China and India, these large gas
consuming markets. With regards to the droughts, Now that one's
(04:10):
actually been interesting, and quite frankly, it's caught the gas
market and the LERG market off guard a couple times.
So when you have droughts in regions or in countries
and markets that are actually particularly hydro power dependent, i e.
Power being generated from rain precipitation hydro reservoirs. When you've
got less hydro in those reserves, you've got less power
(04:33):
generation from that source. The quickest thing for you to
be able to supplement that is actually gas generation. So
we found that drought in Columbia and Brazil have actually
led to really huge increases in LNG imports, and that
LNG is actually you know, that energy would have actually
gone to Europe instead for storage during the summer, but
(04:54):
that coincides with the Southern Hemisphere's winter season and that's
actually their peak demand season and for power. So yeah, droughts,
heat waves, in all of these other things. We're even
actually increasingly caring about wind speeds as well. In periods
of low wind speeds, particularly in the third quarter in
the run up to winter. We've actually seen it have
(05:15):
an impact in Europe where economies that have high shares
of wind generation when there's no wind, gas or coal
depending on the market, does come in to fill the gap.
Speaker 4 (05:25):
That's so interesting.
Speaker 1 (05:26):
It's a little bit like the butterfly flapping its wings
in the Amazon and there being a hurricane in the
Pacific if it's not too rainy in Brazil and Columbia. Certainly,
natural gas prices are more expensive in Europe as a result,
we're living in an increasingly interconnected world when it comes
to energy, even more so than in the past, and
(05:46):
it's because of natural gas in these changing weather dynamics.
So what are the some of the opportunities that arise
from this for the people in the gas market who
are a trading.
Speaker 2 (05:55):
Gas Oh gosh, yeah, you'll always find opportunities to make
money's on in this market. But some of the things
that at least I'm looking out for in the gas
markets this year in particular, We're going to go into
a little bit of gas speak here, but the spreads
between the Asian gas price and the European gas price.
(06:17):
Those are razor thin right now. They're less than a
dollar put MMB to you.
Speaker 1 (06:23):
For people who aren't familiar, this spread is a fancy
word for the difference in price.
Speaker 2 (06:28):
That spread sounds cool.
Speaker 4 (06:29):
Yeah, spread sounds cool. It's true. So the spread is
raisor thin. Am I doing it right? Yes?
Speaker 2 (06:35):
You are well done. Trader, so those spreads are thin,
so there's not much room to actually maneuver and play
a game of arbitrage between the two different regions. Another
thing that's really interesting now, the average price or the
prices of long term contracted liquified natural gas, which are
(06:55):
actually most predominantly linked to oil. At current prices, they
are actually cheaper than an LNGY cargo on the spot market.
So i'll say that again. So contract energy prices today
are at about ten dollars per mmbtu, at about over
seventy five dollars per barrel if you're looking at Brent. Now,
when that happens, when your contracted long term deliveries of
(07:17):
LERG end up being cheaper than the spot market, they're
going to have a couple of things happen. You're going
to have buyers who are going to want to negotiate
with their suppliers to say, please, please, please give me
more of my contract energy because it's cheaper. And you're
also going to have situations where these buyers who are
sevy portfolio managers and players, they're going to want to
try to sell any excess energy they're not going to
(07:40):
use onto the spot market. Because they're going to make
a huge profit on that. They're going to make a
real margin on that. So we're going to see a
lot of what we call cargo resales potentially, especially for
markets that are really going to need it for storage
injections during the summer or for the heat waves that come.
Speaker 4 (07:55):
Got it.
Speaker 1 (07:55):
I should also mention you talked about Brent. For those
who are not familiar, Brent is an oil price. It's
an oil price index. It's just sort of something that
I've always wandered about, and now I have the opportunity
to ask you this question in front of an audience
of thousands, So no pressure. I've never fully understood why
there are LNG contracts indexed against oil prices. They're two
(08:17):
completely different things, right, Why is that just out of interest?
Speaker 2 (08:22):
Really really good question. It goes back to history. There
are a couple things. It used to be that the
alternative fuel to burning gas was usually some kind of
crude oil derivative, I use some kind of oil product,
So gas used to always be priced of the alternative fuel,
and in this case, it was actually oil products. Now,
in places where it's been gas to gas competition, pricing
(08:45):
that's evolved in the US, in Europe, Asia still the last,
let's say, stronghold of oil gas pricing, but that is
very much for legacy reasons that a lot of these
long term contracts as I was talking about, for legacy reasons,
have still been using oil price linkages. But that does
not actually mean that the two commodities are actually related
(09:10):
to each other. They used to be years ago. Spot
liquefied natural gas prices used to be highly influenced by
oil prices, but now that's very much decoupled. There's very
much gas to gas competition, and because of this global
gas market that we're now in, that link is not
really there anymore. But again for legacy reasons, that oil
(09:31):
link is in the contracts. It's also something that is
easily hedged from a risk management perspective because the financial
derivatives market for rent futures, for these hedging instruments that
can help protect you against the volatility of oil prices
are a lot more established. Banks are a lot more
comfortable with it. The border directors signing off on these
(09:52):
long term energy purchase agreements are a lot more comfortable
with it. So for legacy reason, it still stays in
the gas market, but it is changing.
Speaker 1 (10:00):
Yeah, I was just going to ask, So these arbitrage
opportunities you mentioned that exist in twenty twenty five because
of this legacy of indexing against oil. I suppose every
time someone is just making a bunch of money through arbitrage,
there's someone else who's thinking, shucks, I made a bad deal.
You know, I could have signed a better contract. And
(10:20):
so each of these arbitrage opportunities ultimately are what is
going to close the door on this because there's going
to be less and less people willing to sign those
kinds of contracts. So is this something that is not
going to exist for that much longer this type of opportunity,
I think it.
Speaker 2 (10:35):
Really depends Tom and I think, you know, depending on
the supplier of LNG. So there have been some suppliers
in the market who have been steadfast against keeping that
oil indexation in their contracts, and there's some such as
US LNG producers, they are adamant on US gas pricing
in the LNG contracts. Now, it's always good to have
(10:56):
a portfolio of your price exposure, so most by will
have a mixed exposure to different price benchmarks. So whether
we'll see that oil indexation go away really comes down
to whether the suppliers will stop using it, whether the
buyers will stop asking.
Speaker 4 (11:14):
For prices to be on that.
Speaker 2 (11:16):
But in terms of the link it isn't there anymore.
It still fundamentally comes down to in the contracts. This
was just more the common practice now, whether they're willing
to try something new and different, or whether there's going
to be some kind of Asian gas price benchmark that
everybody can rally behind, still really yet be seen.
Speaker 1 (11:37):
Another feature of this sort of evolving market that is
increasingly global. I mean for it to even work, there
needs to be ships. And in your reports you're forecasting
an oversupply around twenty thirty of LNG because there's all
sorts of projects coming online. Is there going to be
an oversupply of ships as well? I mean, is you
know the whole picture, is it coming together? Is there
anything that there's going to be not enough of or
(11:58):
too much of?
Speaker 4 (11:59):
Yeah?
Speaker 2 (12:00):
That is a really fantastic question, because this is something
I particularly find really interesting about this year, the dynamics
in the market, and we started to already see it
creeping in towards the tail end of last year. So
let's put it this way, you can always you can
you can expect the shipping industry to run a tight ship.
So what's happened here is that the big LENG supply projects,
(12:24):
you know, these these are huge billion dollar projects. They
take a while to construct, and they're pretty notorious for
actually having delays. So what's happened now is that a
number of these LNG supply export projects have been delayed,
but the ships that were commissioned and built to carry
that supply have come on time, right. So, and now
(12:45):
the reason the ship the shipping industry really has got
to run a tight book like that is because these
fabrication yards they're booked top. They have slots of people,
you know, who want new LNG tankers, and there are
very few shipyards around the world now who can actually
build LNG tankers. They're really only in Korea and China now,
so limited slots. So they work like clockwork and they
(13:08):
churn out those ships on time. But the projects that
they were built for have been delayed. So we're in
a situation now where there are a lot of LNG
ships on water with less supply to actually carry. So
what happens there is that the shipping rates. The freight
rates for these LNG ships have gone down, they've tanked,
(13:28):
so it's super cheap now to rent an lerngy tanker.
So the thing to watch this year is going to be, actually,
how is the market going to respond to that? Are
they going to do something what the industry calls slow steaming,
which is basically the ships are just going to move
really really really slowly and they're not going to be
in a hurry to get anywhere. Are they actually going
(13:50):
to lay them up, which in the industry means you're
basically just going to a pocket an important turn off
the engine and keep it idle for a bit. Or
what they might even do is they might actually scrap
it them to the graveyard for ships and basically decommission
them and scrap them. It's going to be interesting to
see how the market responds to it, whether they're going
to hold these ships. We're is costing them every day.
(14:11):
You got a crew, you got to pay for fuel,
you got manning, you got all these operating costs of
operating these ships, and you got nothing to ship. So
how are the market, how are the supply is how
are the charterers of these ships going to manage that
fleet is going to be quite in the strength. I
will say, though, as much as some of the industry
is thinking that people might start to scrap the really,
(14:33):
really old lergy ships because they're super inefficient, high emissions
and we care a little less for them, I'd caution
over laying up too many ships because when those projects
actually do come online, those ships need to come in
pretty quickly in order to not have an impact on
prices to have a tight shipping market. Because enough ships
(14:54):
were ordered for the amount of supply that the lergy
market anticipated. It's just a mismatch timing.
Speaker 1 (15:00):
Right now, right, So don't go sending your ship off
to ship heaven.
Speaker 4 (15:03):
Quite yet, No, not quite yet.
Speaker 3 (15:05):
No.
Speaker 1 (15:06):
Speaking of the global picture, I want about the geopolitical landscape,
the potential impact of the Trump presidency Europe, Russia. I mean,
for me being based here in the US. I've often
said that for the incoming administration, LNG is their trump
card globally but boom, But I mean.
Speaker 4 (15:26):
In particular, I think the US.
Speaker 1 (15:27):
This is a central question for the US because there's
so much potential influence that can be wielded. Because it
is the world's largest exporter of LERG now, but just
more broadly, like what machinations do you see happening over
twenty twenty five in relation to LERG, particularly with a
president in the US that is more favorable towards it
than his predecessor.
Speaker 2 (15:47):
I'll say a few thoughts or more. I'll ramble for
a little bit, my thoughts on the topic.
Speaker 1 (15:54):
That is how you do talk about geopolitics. That's not
used as how anyway. That is conversation about geopolitics. Rambling thoughts,
rambling thoughts. Let's get your rambling thoughts all right.
Speaker 2 (16:03):
First ramble is, let's talk about Europe. What's happened since
the first of January. For those who watch the natural
gas markets, Russian gas has now officially stopped flowing through Ukraine. Now,
that's the end of five decades of transit through that
way to get Russian gas to Europe. Next year, we're
(16:24):
anticipating that there's going to actually be a lot more
Russian LNG flowing into Europe. That's for various reasons. There's
already a fear about to Russian LNG flowing into Europe.
There's going to be more with an upcoming transhipment ban
that's going to be happening. But what we've been hearing
from the upcoming Trump presidency is that he wants to
(16:44):
send more USLNG to Europe. Now, the US is already
the largest supplier of ln G to Europe. That is
always going to make the most economical sense, and also
from an operational perspective, it is the nearest major market
that the US can send its LNG. Two, there are
other markets that are closer that could service the Asian market.
(17:07):
It takes a long time to send US LNG over
to Asia, so the most natural destination for US LNG
is in fact Europe. So there's only so much more
US LNG can go to Europe without Europe explicitly saying
that they actually want more gas. Right now, LNG is
(17:28):
just meeting the existing gas demand. You can't send any
more LNG to Europe that it doesn't necessarily need. So
from the US is positioning point of view, if the
US wants to have more LNG export projects, they'll need
to be able to firm up that demand. So I
guess the point that I'm trying to make it is
(17:49):
just that's you know, yes, LNG has come in to
fill a gap that Russian pipeline gas is not filling anymore.
But if you're looking at substantially increasing the amount of
LGY imports that go into Europe, there's got to be
actual fundamental increases in gas demand. I think the biggest
(18:12):
question mark in the gas industry right now, and I've
been saying it for some time now, it's when you
get to an oversupply situation, which everybody's anticipating. Depending on
research house in which podcast you listen to, they're projected
anywhere between twenty twenty seven to twenty thirty where a
new flood of LNG is going to come and that's
going to bring down the price of LERG. And when
(18:33):
things and when gas becomes cheaper again, does it actually
unlock further demand? So if gas is really cheap again,
will you burn more of it? Will you actually stop
burning more of it? And that is actually the demand
that if the US wants to have more LERGY projects,
they need to firm that demand if Europe is their market.
Speaker 1 (18:56):
I mean, maybe this is a different way of saying
what you're saying in terms of firming demand, but you
could say that when the market is oversupplied, buyers start
to ask for what they want, and it's not just
the cheapest boatload of energy. And one of the things
that gets talked about is the kind of embedded methane
emissions in energy of different forms, is rather than firming
(19:18):
up demand to become the preferred supplier in a market,
and is the way to become the preferred supplier to
be able to certify and demonstrate.
Speaker 4 (19:26):
That your leg is greener than everyone else's.
Speaker 2 (19:29):
I think, I mean that is going to depend on
your buyer profile.
Speaker 5 (19:32):
Right.
Speaker 2 (19:33):
If they want that kind of energy, then they'll sign
up for it. Now, whether they're willing to pay a
premium for it still very much comes to a buyer
appetite of that. I think it's something that the US
can absolutely position itself from a methane intensity perspective. I
think the US has come out as a strong contender
(19:53):
in that sense. It can be lower, So it could
be leverage that the US has all different energies. Suppliers
are touting their own quote green credentials. You've got LNG
plants that are saying, oh, I'm you know, I'm using
completely zero emissions power to produce all of my leg,
so I've got the best lerg or I've used carbon
(20:15):
offsets to offset the entire emissions life cycle of my leg,
so my lergy is better. Or as a supplier of LERG,
you should pay that premium to me for my green
llerngy cargo. So I think there are ways to position
different LERG sources. I think for the US, I do
really wonder more about the implications of expanding the LNG
(20:40):
export industry to a level that's perhaps unsustainable for the
US domestic market. The US gas market is the largest
in the world, but the lergy export gas that is
required is just a.
Speaker 4 (20:54):
Fraction of it.
Speaker 2 (20:55):
So when you start piling more of that stuff, you're
going to need to get more shale gas out of
the ground. You get more shale gas out of the
ground word to incentivize drillersts to do so, you are
going to need to have some higher prices. There's a
lot of resource in the US, but it's still constraint
because prices are not high enough to merit drilling for
that yet. So with higher prices does actually mean you're
(21:17):
going to get higher domestic prices to a certain extent,
And I guess I do wonder how much the US
is willing to sustain those dynamics, because let's also remember
that there was a time when the US was importing
LNG it was short of gas, and then they very
quickly turn that around. The premise of the US LNG
(21:39):
expot market is also very different when you look at
it from a geopolitical standpoint, if you're thinking about leg
as a trump card for sort of positioning politically in
terms of supplying this critical energy source.
Speaker 4 (21:54):
Historically, the way those.
Speaker 2 (21:56):
Hydrocarbon relationships used to work with nations and governments was
that it was a point A to B sale and
there was that direct link between important and exporter country
or market. But the way the US LNG export industry
is designed is that most of it is actually sold
at US shores and then the buyer actually takes it
(22:17):
to whatever location they want to do. It's been the
attraction of US LNG is what we call free on
board delivery, which is basically they won't send it to
your home, pick it up from the Gulf Mexico and
have ad it send it wherever you like with permits
from the DOE.
Speaker 1 (22:32):
That is so at the moment, if the US doesn't
have the tools to use LNG as a political lever
because the.
Speaker 2 (22:41):
LERG will go to whoever is going to pay the
highest for it. So, you know, the LNG is a
very free flowing market where the supply will go to
wherever the demand is and things will get swapped and
traded and moved around. That it's going to be quite
difficult to say, Okay, well I'm going to use LNG
(23:01):
to particularly.
Speaker 4 (23:03):
You know, exert this kind of influence.
Speaker 2 (23:05):
Exert this kind of influence because those market dynamics are
just going to work themselves out.
Speaker 1 (23:11):
Files we're out of time. But this has been a
fascinating conversation. I really think that gas and its importance
is under discussed, and particularly LNG.
Speaker 4 (23:21):
It's that a fascinating place.
Speaker 1 (23:23):
Even if it's not necessarily going to be the political
lever that we might think it could be, or that
one might think it could be. I still think that
itself is fascinating. So really appreciate you coming in and
talking through all of this.
Speaker 4 (23:34):
Thank you for joining us.
Speaker 3 (23:36):
Today, Thanks for having me look forward to the next one.
Speaker 5 (23:48):
Today's episode of Switched On was produced by cam Gray
with production assistants from Kamala Shelling. Bloomberg. Ne EF is
a service provided by Bloomberg Finance LP And its affiliates.
This recording does not constitute, nor should it be construed,
as investment advice, investment recommendations, or a recommendation as to
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considered as information sufficient upon which to base an investment decision.
(24:11):
Neither Bloomberg Finance LP Nor any of its affiliates makes
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of the information contained in this recording, and any liability
as a result of this recording is expressly disclaimed.
This is Tom Rowlands Reis and you're listening to Switched
on the BNF podcast. At the beginning of every year,
BNF analysts release their series of Things to Watch notes,
laying out their predictions and insights for the year ahead.
Today we turn to our gas team and take a
look at the predictions of what is one of our
most in demand commodities. Since the Russian invasion of Ukraine
in twenty twenty two, the gas sector has experienced extreme
(00:21):
swings in pricing and the complete re routing of some
trade flows. The drama isn't over yet. Our analysts foresee
further turbulence ahead and have DUG twenty twenty five a
stress test for gas in terms of supply. The world's
largest exporter of energy, the US, may look to explore
even more under the incoming Trump administration. While the final
gas pipeline from Russian to the EU has now been
(00:42):
turned off for demand, what was traditionally a winter fuel
is now being burned through summer months as countries seek
additional power generation to cope with rising temperatures and away
from the buying and selling of the commodity itself. Services
sectors are also feeding the pressure with an over supply
of ships hitting the seas to guide us through some
of the things on the horizon for the global gas market. Today,
I'm joined by Fausia Marzuki, Bloomberg and yf's global head
(01:05):
of Gas Markets. Together we discuss findings from her team's
report Gas Things to Watch in twenty twenty five crunch
time before comeback, which BNF clients can find a BNF
go on the Bloomberg Terminal or BNIF dot com. Now
to the show and what to expect from gas during
the year ahead. Thank you for joining us today, faus
(01:32):
on the podcast, Let's talk about gas.
Speaker 2 (01:35):
Who thanks for having me.
Speaker 3 (01:36):
Tom.
Speaker 1 (01:37):
Last time you're on the show, one of the things
you talked about was how weather cycles are and extreme
weather events and on top of that are impacting the
price dynamics of coal.
Speaker 4 (01:47):
We're talking about a report that you published with our
colleague you me Kim.
Speaker 1 (01:50):
But now we're talking about gas, which is your your
your day job now leading our analysis globally on gas.
So how is weather impacting gas demand in twenty twenty
five and are changing climate patterns likely to have an impact?
Speaker 2 (02:03):
So it's really interesting the fundamentals of the gas market
were very much built around is going to be a
cold winter and we're storing gas to meet the winter.
So gas traders and the gas market would really only
just look at the Northern Hemisphere winter season. But now
with changing climate patterns, increasingly gas traders need to be
worried about heat waves, they need to be worried about
(02:25):
rainfall and drought. So it's coming to a point where
actually the summers are becoming more interesting or actually perhaps
even a lot more difficult to predict with regards to
how that's actually going to be influencing the gas market. Now.
Summer is in particular because that's when you're supposed to
be injecting gas into storage to save it for the winter.
But what we've seen some really interesting flips in the
(02:48):
market that in Europe the benchmark price there, the summer
prices are actually more expensive than winter. Now, it's just
markets have gone completely convoluted. To us at the next step,
and it is because of changing weather patterns.
Speaker 1 (03:02):
I'm going to speak on behalf of maybe some of
our listeners who are less familiar with gas but are
interested in getting interested in it. So you mentioned a
few things. I mean, one is, you know, gas injections.
I'm just going to tell everyone now, having kind of
been adjacent to gas for arth, that's gas industry speak
for putting gas into storage for later. And then they's
the what's the word when you take it out? What's
(03:23):
the opposite of an injection withdrawal?
Speaker 4 (03:25):
An injection and a withdrawal.
Speaker 1 (03:27):
It sounds like something much worse because they have an
injection and withdrawal cycle, but that is what the gas
market works on. So putting into storage for taking out later.
And you mentioned cold winters, they watch that and it's
I think that's fairly intuitive why that matters because people
burn gas to keep warm. But why do the hot
summers have an impact and why does drought have an
(03:47):
impact on the gas market?
Speaker 2 (03:49):
Excellent question. So when it's hot, you need a lot
of air conditioning, and that air conditioning is very much
powered by gas power generation, especially in a lot of
the big gas economies like the US, places in Southeast
Asia and parts of China and India, these large gas
consuming markets. With regards to the droughts, Now that one's
(04:10):
actually been interesting, and quite frankly, it's caught the gas
market and the LERG market off guard a couple times.
So when you have droughts in regions or in countries
and markets that are actually particularly hydro power dependent, i e.
Power being generated from rain precipitation hydro reservoirs. When you've
got less hydro in those reserves, you've got less power
(04:33):
generation from that source. The quickest thing for you to
be able to supplement that is actually gas generation. So
we found that drought in Columbia and Brazil have actually
led to really huge increases in LNG imports, and that
LNG is actually you know, that energy would have actually
gone to Europe instead for storage during the summer, but
(04:54):
that coincides with the Southern Hemisphere's winter season and that's
actually their peak demand season and for power. So yeah, droughts,
heat waves, in all of these other things. We're even
actually increasingly caring about wind speeds as well. In periods
of low wind speeds, particularly in the third quarter in
the run up to winter. We've actually seen it have
(05:15):
an impact in Europe where economies that have high shares
of wind generation when there's no wind, gas or coal
depending on the market, does come in to fill the gap.
Speaker 4 (05:25):
That's so interesting.
Speaker 1 (05:26):
It's a little bit like the butterfly flapping its wings
in the Amazon and there being a hurricane in the
Pacific if it's not too rainy in Brazil and Columbia. Certainly,
natural gas prices are more expensive in Europe as a result,
we're living in an increasingly interconnected world when it comes
to energy, even more so than in the past, and
(05:46):
it's because of natural gas in these changing weather dynamics.
So what are the some of the opportunities that arise
from this for the people in the gas market who
are a trading.
Speaker 2 (05:55):
Gas Oh gosh, yeah, you'll always find opportunities to make
money's on in this market. But some of the things
that at least I'm looking out for in the gas
markets this year in particular, We're going to go into
a little bit of gas speak here, but the spreads
between the Asian gas price and the European gas price.
(06:17):
Those are razor thin right now. They're less than a
dollar put MMB to you.
Speaker 1 (06:23):
For people who aren't familiar, this spread is a fancy
word for the difference in price.
Speaker 2 (06:28):
That spread sounds cool.
Speaker 4 (06:29):
Yeah, spread sounds cool. It's true. So the spread is
raisor thin. Am I doing it right? Yes?
Speaker 2 (06:35):
You are well done. Trader, so those spreads are thin,
so there's not much room to actually maneuver and play
a game of arbitrage between the two different regions. Another
thing that's really interesting now, the average price or the
prices of long term contracted liquified natural gas, which are
(06:55):
actually most predominantly linked to oil. At current prices, they
are actually cheaper than an LNGY cargo on the spot market.
So i'll say that again. So contract energy prices today
are at about ten dollars per mmbtu, at about over
seventy five dollars per barrel if you're looking at Brent. Now,
when that happens, when your contracted long term deliveries of
(07:17):
LERG end up being cheaper than the spot market, they're
going to have a couple of things happen. You're going
to have buyers who are going to want to negotiate
with their suppliers to say, please, please, please give me
more of my contract energy because it's cheaper. And you're
also going to have situations where these buyers who are
sevy portfolio managers and players, they're going to want to
try to sell any excess energy they're not going to
(07:40):
use onto the spot market. Because they're going to make
a huge profit on that. They're going to make a
real margin on that. So we're going to see a
lot of what we call cargo resales potentially, especially for
markets that are really going to need it for storage
injections during the summer or for the heat waves that come.
Speaker 4 (07:55):
Got it.
Speaker 1 (07:55):
I should also mention you talked about Brent. For those
who are not familiar, Brent is an oil price. It's
an oil price index. It's just sort of something that
I've always wandered about, and now I have the opportunity
to ask you this question in front of an audience
of thousands, So no pressure. I've never fully understood why
there are LNG contracts indexed against oil prices. They're two
(08:17):
completely different things, right, Why is that just out of interest?
Speaker 2 (08:22):
Really really good question. It goes back to history. There
are a couple things. It used to be that the
alternative fuel to burning gas was usually some kind of
crude oil derivative, I use some kind of oil product,
So gas used to always be priced of the alternative fuel,
and in this case, it was actually oil products. Now,
in places where it's been gas to gas competition, pricing
(08:45):
that's evolved in the US, in Europe, Asia still the last,
let's say, stronghold of oil gas pricing, but that is
very much for legacy reasons that a lot of these
long term contracts as I was talking about, for legacy reasons,
have still been using oil price linkages. But that does
not actually mean that the two commodities are actually related
(09:10):
to each other. They used to be years ago. Spot
liquefied natural gas prices used to be highly influenced by
oil prices, but now that's very much decoupled. There's very
much gas to gas competition, and because of this global
gas market that we're now in, that link is not
really there anymore. But again for legacy reasons, that oil
(09:31):
link is in the contracts. It's also something that is
easily hedged from a risk management perspective because the financial
derivatives market for rent futures, for these hedging instruments that
can help protect you against the volatility of oil prices
are a lot more established. Banks are a lot more
comfortable with it. The border directors signing off on these
(09:52):
long term energy purchase agreements are a lot more comfortable
with it. So for legacy reason, it still stays in
the gas market, but it is changing.
Speaker 1 (10:00):
Yeah, I was just going to ask, So these arbitrage
opportunities you mentioned that exist in twenty twenty five because
of this legacy of indexing against oil. I suppose every
time someone is just making a bunch of money through arbitrage,
there's someone else who's thinking, shucks, I made a bad deal.
You know, I could have signed a better contract. And
(10:20):
so each of these arbitrage opportunities ultimately are what is
going to close the door on this because there's going
to be less and less people willing to sign those
kinds of contracts. So is this something that is not
going to exist for that much longer this type of opportunity,
I think it.
Speaker 2 (10:35):
Really depends Tom and I think, you know, depending on
the supplier of LNG. So there have been some suppliers
in the market who have been steadfast against keeping that
oil indexation in their contracts, and there's some such as
US LNG producers, they are adamant on US gas pricing
in the LNG contracts. Now, it's always good to have
(10:56):
a portfolio of your price exposure, so most by will
have a mixed exposure to different price benchmarks. So whether
we'll see that oil indexation go away really comes down
to whether the suppliers will stop using it, whether the
buyers will stop asking.
Speaker 4 (11:14):
For prices to be on that.
Speaker 2 (11:16):
But in terms of the link it isn't there anymore.
It still fundamentally comes down to in the contracts. This
was just more the common practice now, whether they're willing
to try something new and different, or whether there's going
to be some kind of Asian gas price benchmark that
everybody can rally behind, still really yet be seen.
Speaker 1 (11:37):
Another feature of this sort of evolving market that is
increasingly global. I mean for it to even work, there
needs to be ships. And in your reports you're forecasting
an oversupply around twenty thirty of LNG because there's all
sorts of projects coming online. Is there going to be
an oversupply of ships as well? I mean, is you
know the whole picture, is it coming together? Is there
anything that there's going to be not enough of or
(11:58):
too much of?
Speaker 4 (11:59):
Yeah?
Speaker 2 (12:00):
That is a really fantastic question, because this is something
I particularly find really interesting about this year, the dynamics
in the market, and we started to already see it
creeping in towards the tail end of last year. So
let's put it this way, you can always you can
you can expect the shipping industry to run a tight ship.
So what's happened here is that the big LENG supply projects,
(12:24):
you know, these these are huge billion dollar projects. They
take a while to construct, and they're pretty notorious for
actually having delays. So what's happened now is that a
number of these LNG supply export projects have been delayed,
but the ships that were commissioned and built to carry
that supply have come on time, right. So, and now
(12:45):
the reason the ship the shipping industry really has got
to run a tight book like that is because these
fabrication yards they're booked top. They have slots of people,
you know, who want new LNG tankers, and there are
very few shipyards around the world now who can actually
build LNG tankers. They're really only in Korea and China now,
so limited slots. So they work like clockwork and they
(13:08):
churn out those ships on time. But the projects that
they were built for have been delayed. So we're in
a situation now where there are a lot of LNG
ships on water with less supply to actually carry. So
what happens there is that the shipping rates. The freight
rates for these LNG ships have gone down, they've tanked,
(13:28):
so it's super cheap now to rent an lerngy tanker.
So the thing to watch this year is going to be, actually,
how is the market going to respond to that? Are
they going to do something what the industry calls slow steaming,
which is basically the ships are just going to move
really really really slowly and they're not going to be
in a hurry to get anywhere. Are they actually going
(13:50):
to lay them up, which in the industry means you're
basically just going to a pocket an important turn off
the engine and keep it idle for a bit. Or
what they might even do is they might actually scrap
it them to the graveyard for ships and basically decommission
them and scrap them. It's going to be interesting to
see how the market responds to it, whether they're going
to hold these ships. We're is costing them every day.
(14:11):
You got a crew, you got to pay for fuel,
you got manning, you got all these operating costs of
operating these ships, and you got nothing to ship. So
how are the market, how are the supply is how
are the charterers of these ships going to manage that
fleet is going to be quite in the strength. I
will say, though, as much as some of the industry
is thinking that people might start to scrap the really,
(14:33):
really old lergy ships because they're super inefficient, high emissions
and we care a little less for them, I'd caution
over laying up too many ships because when those projects
actually do come online, those ships need to come in
pretty quickly in order to not have an impact on
prices to have a tight shipping market. Because enough ships
(14:54):
were ordered for the amount of supply that the lergy
market anticipated. It's just a mismatch timing.
Speaker 1 (15:00):
Right now, right, So don't go sending your ship off
to ship heaven.
Speaker 4 (15:03):
Quite yet, No, not quite yet.
Speaker 3 (15:05):
No.
Speaker 1 (15:06):
Speaking of the global picture, I want about the geopolitical landscape,
the potential impact of the Trump presidency Europe, Russia. I mean,
for me being based here in the US. I've often
said that for the incoming administration, LNG is their trump
card globally but boom, But I mean.
Speaker 4 (15:26):
In particular, I think the US.
Speaker 1 (15:27):
This is a central question for the US because there's
so much potential influence that can be wielded. Because it
is the world's largest exporter of LERG now, but just
more broadly, like what machinations do you see happening over
twenty twenty five in relation to LERG, particularly with a
president in the US that is more favorable towards it
than his predecessor.
Speaker 2 (15:47):
I'll say a few thoughts or more. I'll ramble for
a little bit, my thoughts on the topic.
Speaker 1 (15:54):
That is how you do talk about geopolitics. That's not
used as how anyway. That is conversation about geopolitics. Rambling thoughts,
rambling thoughts. Let's get your rambling thoughts all right.
Speaker 2 (16:03):
First ramble is, let's talk about Europe. What's happened since
the first of January. For those who watch the natural
gas markets, Russian gas has now officially stopped flowing through Ukraine. Now,
that's the end of five decades of transit through that
way to get Russian gas to Europe. Next year, we're
(16:24):
anticipating that there's going to actually be a lot more
Russian LNG flowing into Europe. That's for various reasons. There's
already a fear about to Russian LNG flowing into Europe.
There's going to be more with an upcoming transhipment ban
that's going to be happening. But what we've been hearing
from the upcoming Trump presidency is that he wants to
(16:44):
send more USLNG to Europe. Now, the US is already
the largest supplier of ln G to Europe. That is
always going to make the most economical sense, and also
from an operational perspective, it is the nearest major market
that the US can send its LNG. Two, there are
other markets that are closer that could service the Asian market.
(17:07):
It takes a long time to send US LNG over
to Asia, so the most natural destination for US LNG
is in fact Europe. So there's only so much more
US LNG can go to Europe without Europe explicitly saying
that they actually want more gas. Right now, LNG is
(17:28):
just meeting the existing gas demand. You can't send any
more LNG to Europe that it doesn't necessarily need. So
from the US is positioning point of view, if the
US wants to have more LNG export projects, they'll need
to be able to firm up that demand. So I
guess the point that I'm trying to make it is
(17:49):
just that's you know, yes, LNG has come in to
fill a gap that Russian pipeline gas is not filling anymore.
But if you're looking at substantially increasing the amount of
LGY imports that go into Europe, there's got to be
actual fundamental increases in gas demand. I think the biggest
(18:12):
question mark in the gas industry right now, and I've
been saying it for some time now, it's when you
get to an oversupply situation, which everybody's anticipating. Depending on
research house in which podcast you listen to, they're projected
anywhere between twenty twenty seven to twenty thirty where a
new flood of LNG is going to come and that's
going to bring down the price of LERG. And when
(18:33):
things and when gas becomes cheaper again, does it actually
unlock further demand? So if gas is really cheap again,
will you burn more of it? Will you actually stop
burning more of it? And that is actually the demand
that if the US wants to have more LERGY projects,
they need to firm that demand if Europe is their market.
Speaker 1 (18:56):
I mean, maybe this is a different way of saying
what you're saying in terms of firming demand, but you
could say that when the market is oversupplied, buyers start
to ask for what they want, and it's not just
the cheapest boatload of energy. And one of the things
that gets talked about is the kind of embedded methane
emissions in energy of different forms, is rather than firming
(19:18):
up demand to become the preferred supplier in a market,
and is the way to become the preferred supplier to
be able to certify and demonstrate.
Speaker 4 (19:26):
That your leg is greener than everyone else's.
Speaker 2 (19:29):
I think, I mean that is going to depend on
your buyer profile.
Speaker 5 (19:32):
Right.
Speaker 2 (19:33):
If they want that kind of energy, then they'll sign
up for it. Now, whether they're willing to pay a
premium for it still very much comes to a buyer
appetite of that. I think it's something that the US
can absolutely position itself from a methane intensity perspective. I
think the US has come out as a strong contender
(19:53):
in that sense. It can be lower, So it could
be leverage that the US has all different energies. Suppliers
are touting their own quote green credentials. You've got LNG
plants that are saying, oh, I'm you know, I'm using
completely zero emissions power to produce all of my leg,
so I've got the best lerg or I've used carbon
(20:15):
offsets to offset the entire emissions life cycle of my leg,
so my lergy is better. Or as a supplier of LERG,
you should pay that premium to me for my green
llerngy cargo. So I think there are ways to position
different LERG sources. I think for the US, I do
really wonder more about the implications of expanding the LNG
(20:40):
export industry to a level that's perhaps unsustainable for the
US domestic market. The US gas market is the largest
in the world, but the lergy export gas that is
required is just a.
Speaker 4 (20:54):
Fraction of it.
Speaker 2 (20:55):
So when you start piling more of that stuff, you're
going to need to get more shale gas out of
the ground. You get more shale gas out of the
ground word to incentivize drillersts to do so, you are
going to need to have some higher prices. There's a
lot of resource in the US, but it's still constraint
because prices are not high enough to merit drilling for
that yet. So with higher prices does actually mean you're
(21:17):
going to get higher domestic prices to a certain extent,
And I guess I do wonder how much the US
is willing to sustain those dynamics, because let's also remember
that there was a time when the US was importing
LNG it was short of gas, and then they very
quickly turn that around. The premise of the US LNG
(21:39):
expot market is also very different when you look at
it from a geopolitical standpoint, if you're thinking about leg
as a trump card for sort of positioning politically in
terms of supplying this critical energy source.
Speaker 4 (21:54):
Historically, the way those.
Speaker 2 (21:56):
Hydrocarbon relationships used to work with nations and governments was
that it was a point A to B sale and
there was that direct link between important and exporter country
or market. But the way the US LNG export industry
is designed is that most of it is actually sold
at US shores and then the buyer actually takes it
(22:17):
to whatever location they want to do. It's been the
attraction of US LNG is what we call free on
board delivery, which is basically they won't send it to
your home, pick it up from the Gulf Mexico and
have ad it send it wherever you like with permits
from the DOE.
Speaker 1 (22:32):
That is so at the moment, if the US doesn't
have the tools to use LNG as a political lever
because the.
Speaker 2 (22:41):
LERG will go to whoever is going to pay the
highest for it. So, you know, the LNG is a
very free flowing market where the supply will go to
wherever the demand is and things will get swapped and
traded and moved around. That it's going to be quite
difficult to say, Okay, well I'm going to use LNG
(23:01):
to particularly.
Speaker 4 (23:03):
You know, exert this kind of influence.
Speaker 2 (23:05):
Exert this kind of influence because those market dynamics are
just going to work themselves out.
Speaker 1 (23:11):
Files we're out of time. But this has been a
fascinating conversation. I really think that gas and its importance
is under discussed, and particularly LNG.
Speaker 4 (23:21):
It's that a fascinating place.
Speaker 1 (23:23):
Even if it's not necessarily going to be the political
lever that we might think it could be, or that
one might think it could be. I still think that
itself is fascinating. So really appreciate you coming in and
talking through all of this.
Speaker 4 (23:34):
Thank you for joining us.
Speaker 3 (23:36):
Today, Thanks for having me look forward to the next one.
Speaker 5 (23:48):
Today's episode of Switched On was produced by cam Gray
with production assistants from Kamala Shelling. Bloomberg. Ne EF is
a service provided by Bloomberg Finance LP And its affiliates.
This recording does not constitute, nor should it be construed,
as investment advice, investment recommendations, or a recommendation as to
an investment or other strategy. Bloomberg ANNIAF should not be
considered as information sufficient upon which to base an investment decision.
(24:11):
Neither Bloomberg Finance LP Nor any of its affiliates makes
any representation or warranty as to the accuracy or completeness
of the information contained in this recording, and any liability
as a result of this recording is expressly disclaimed.
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