The IEA Ushers In The Coming Oil Crisis
Comment of the Day

August 05 2021

Commentary by Eoin Treacy

The IEA Ushers In The Coming Oil Crisis

Thanks to a subscriber for this report from Goehring & Rozencwajg which may be of interest. Here is a section on natural gas: 

While supply has been challenged, demand remains extremely strong. Global demand for LNG is robust as weather events and strong economic demand from China and others has led to surging prices and tight markets. Notably, high temperatures across Asia have led to strong demand for electricity to power air conditioning in Bangladesh and India (a sign of the S-Curve). At the same time, Brazilian drought conditions have resulted in lower-than normal hydro availability. Global spot LNG prices averaged $14 per mmbtu, the highest levels since 2013 and above oil-linked parity. Exported US LNG has clearly had no problem being absorbed in the global market, despite having grown from nothing as recently as 2017 to an incredible 10 bcf/d today — up 3 bcf/d in the past year alone. We have long argued that global demand for LNG was much greater than anyone believed possible. As emerging countries become wealthier, they seek cleaner forms of power of which natural gas is the most effective. Gas bears have long argued that excess natural gas supply will eventually break the linkage between global LNG prices and oil prices that has long been central to long-term LNG contracts. The fact that spot LNG today trades above its oil-linked parity suggests to us the market remains very tight. We continue to believe that the global seaborn gas market will continue to absorb new capacity from the US going forward.

The main challenge faced by US natural gas has been the unrelenting growth of the Marcellus and Permian. If we are correct and both plays are entering the early stages of exhaustion, then a new gas bull market has likely started. Production data seems to suggest we are correct and now anecdotal evidence among the producers points that way as well. Inventories are now beginning to get tight relative to seasonal averages and the US will likely enter the withdrawal season vulnerable to any bout of colder-than-normal weather. The great bull market in natural gas has begun.

Eoin Treacy's view

The team at Goehring & Rozencwajg have been steadfast in their belief that the biggest shale regions in the USA are peaking. They first floated the idea more than a year ago and are now coming back with data to support the claim. It’s an incredibly important assertion since so much non-OPEC supply growth has been dependent on the unconventional sector’s success over the last decade. David and I were among the first to forecast the USA would become energy independent. A peak in shale production would endanger that condition.

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