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Spot LNG price plunge positive for CGD players; may hurt GAIL
Key recent developments / data-points in the oil & gas sector are:
* Singapore GRM at US$3.2/bbl in Q4FY19 is down 26% QoQ and 54% YoY; OMCs’ Q4FY19 GRM is estimated at US$5.5-7.0/bbl including inventory gains.
* Net auto fuel marketing margin at Rs4.59/l (up 253% YoY) in Q4FY19 is set to boost OMCs’ EPS by Rs3.7-11.3/share QoQ; net margin is Rs2.6/l on 1-Apr’19.
* Domestic gas price has been hiked by 10%-22% HoH to US$4.1-10.4/mmbtu for H1FY20; ONGC would gain, but GAIL’s LPG profitability would be hit.
* Spot LNG price plunge on weak demand, rising supply and inventory in Asia:
Singapore spot LNG price has plunged by 64% from a peak of US$11.7/mmbtu in mid-Nov’18 to US$4.2/mmbtu in end-Mar’19. 29-43mmt of LNG supply growth is estimated for CY19 while incremental demand from Europe and Asia was expected to absorb the supply. Weak demand in China (~60% of CY18 global LNG demand growth) due to mild winter has meant inventory build-up and unwanted cargoes being resold to consumers in Europe. Another headwind is the restart of five nuclear reactors in Japan in CY18, which may mean 5mmt fall in its LNG imports in CY19. It thus appears that Asian demand has been weak in CY19-TD, which has hit spot LNG prices. Spot LNG prices are expected to remain subdued at least until Sep-Oct’19, when Chinese demand may revive. There is wide variation in LNG supply growth estimates for CY20 – Wood Mackenzie appears to expect 25-30mmt while Shell estimates just 12-13mmt. Restart of more nuclear reactors in Japan and Russia commissioning 125bcm capacity pipelines to supply gas to China, Turkey and Europe are headwinds to LNG demand in CY20. Russia is targeting 38bcm of gas supply to China by pipeline in CY25 and 87bcm in CY35.
* GGL and MGL to gain, but GAIL may be hit by spot LNG price plunge:
Mahanagar Gas (MGL) and Gujarat Gas (GGL) would gain from spot LNG (14%-21% of volumes) weakness. GGL may also gain as NGT ban on coal gasifiers boosts its volumes in Morbi by 1.5-2.0mmscmd, on which margins would be strong. GAIL’s US LNG trading profitability is mainly impacted by US-RasGas LNG delivered price delta but also may be impacted on some cargoes by US-spot LNG price delta. In Q1- Q3FY19 GAIL’s gas trading EBITDA has moved in sync with US LNG-RasGas and US LNG-spot LNG delta. US-spot LNG delta turned negative in Q4FY19 and press reports suggest GAIL recently incurred loss (our estimate: US$2.3/mmbtu) on one US LNG cargo sold at US$4.3/mmbtu in Europe. Hit to GAIL, if any, from weak spot LNG price would depend on the number of its untied cargoes (~10% as of Feb’19) and how long spot LNG remains weak.
* Supply deficit in CY19 if OPEC output remains at Mar’19 level:
In four of the last five years, global supply exceeded demand by 0.5-1.1m b/d. OPEC has cut output by 2m b/d from the Nov’18 peak to 30.4m b/d in Mar’19. We estimate a supply deficit of 0.5m b/d in Q2CY19 and 0.14m b/d in CY19 if OPEC output remains at Mar’19 level. Further fall in Venezuela’s output from the Mar’19 level of 0.89m b/d could cause an oil price spike, but spare capacity of 3.1m b/d should ensure that the spike is not sustainable.
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