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Making the most of flexibility in an oversupplied market

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LNG Industry,

Aurora Energy Research’s recent study on flexibility in the LNG market has found that:

Oversupply will persist into the mid-2020 dampening the intrinsic value of LNG contracts:

  • Supply: the next five years will see the LNG market hit the bottom of a boom-bust cycle with a wave of new supply, before upstream and vessel markets tighten.
  • Demand: Weak demand is likely to prevent a swift recovery and rebalancing will be stalled until 2025.
  • European buyers redirecting LNG cargoes to Asia will earn up to 1.8/MMBtu due to price spread, volatility and transport costs differential.

Marc Hedin, Senior Associate at Aurora said: “Growing competition, liquidity and transparency create opportunities to harness the value of flexibility in an oversupplied LNG market. Buyers can benefit from existing contract flexibility sourcing gas on the spot market while redirecting cargoes from their contracts to higher price regions. Our study shows that the stakes are much higher than previously thought – flexibility can represent a premium of up to 40% of the contract value. Importantly, even if fundamental spreads were to disappear, flexible buyers still stand to gain substantially from short-term volatility. Timing is critical, however – consolidation following a boom-bust cycle will likely limit flexibility opportunities in the long term. Vessels’ operators should anticipate a more efficient use of their tankers and a recovery of the charter rate back to equilibrium by the mid 2020’s.”

In this report, Aurora:

  • Identifies the key drivers of the value of flexibility (volatility, fundamental spread, transport costs).
  • Quantifies the magnitude of the value of flexibility across different scenarios with respect to these key drivers.
  • Identifies the risk to the value of flexibility disappearing (market consolidation).

Read the article online at:

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