Record LNG Imports by India Signal Rising Prices: Energy Markets
Comment of the Day

August 17 2011

Commentary by Eoin Treacy

Record LNG Imports by India Signal Rising Prices: Energy Markets

This article by Dinakar Sethuraman and Pratish Narayana for Bloomberg may be of interest to subscribers. Here is a section:
Indian output may remain at reduced levels for two to three years as it connects new production wells, Standard Chartered said. Reliance plans to drill three more production wells and assess the results before connecting them, the bank said.

"There is no option for India but to rely on LNG imports until domestic gas output moves up," said Avishek Datta, a Mumbai-based analyst at Standard Chartered. "The substitute is naphtha and other costlier fuels." Datta expects India to import 13.1 million tons of LNG in the year through next March.

India will have to import about 2.5 to 3 million tons a year of the fuel to meet the shortfall from Reliance, and additional demand may boost imports of spot cargoes to 5 million tons for the fiscal year ending March 2012, said Patel.

The country bought about 9.8 million tons of LNG for the year ending March 2011, according to the Indian oil ministry.
Imports into the Dahej and Hazira terminals for the three months ended June totaled 2.7 million tons, according to the Petroleum Planning & Analysis Cell.

Eoin Treacy's view Global LNG production capacity remains on a secular upward trajectory spearheaded by countries such as Qatar. Where once natural gas was simply viewed as a useless byproduct of oil extraction, it is swiftly becoming one of the world's most important fuels. The industry remains highly fragmented with differing pricing structures across various continents. However the evolution of LNG means that the commodity is now more internationally fungible which should lead to a more transparent global market over time. Natural gas is transported either by pipeline or via LNG tanker. I reviewed a number of pipeline MLPs in Comment of the Day on August 10th and Canadian pipelines on August 12th.

Of these Veresen, which yields over 7%, is additionally noteworthy because it is building an LNG import terminal in Oregon. The share has held last week's impressive advance and a sustained move below C$12 would be required to question medium-term upside potential.

Cheniere Energy Partners is in the process of building the USA's first LNG export facility. The share broke its progression of higher reaction lows in March completed a first step below the peak and broke downwards again last week. It has since pushed back up into the range but a sustained move above $20 would be required to indicate a return to medium-term demand dominance.

While some of the major oil companies, such as Shell, have their own LNG tankers, there are only a small number of companies offering direct exposure to this sector. Teekay LNG Partners (7.32%), in common with a number of other MLPs, failed to sustain the break to new highs in April, pulled back to break the progression of higher reaction lows, formed a lower high and broke downwards two weeks ago. While it has bounced admirably, a sustained move back above $38.50 will be required to indicate a return to medium-term demand dominance.

Golar LNG (3.02%) accelerated higher from late March and high a peak near NOK220 in late July. It pulled back violently to close the overextension relative to the 200-day MA and bounced impressively last week. The best case scenario now is that the share builds support above NOK150 with a view to reasserting the medium-term uptrend at some point.

Exmar (9.01%) failed to sustain the breakout from its base in April and broke is progression of higher reaction lows in July. It has since fallen to test the €4 area and at least paused above it. The share will have to find support above €4 on a pullback to demonstrate demand is beginning to return to medium-term dominance.

While Veresen has bounced back impressively, the remaining shares have all experienced considerable technical damage. Attractive dividend yields may cushion additional declines somewhat provided they are sustained. This sector is highly leveraged to continued global GDP growth. Continued questions about the likelihood of a US recession may be having an exaggerated impact on these shares.

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