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Msg  231 of 242  at  1/12/2023 8:14:18 PM  by

jerrykrause


LNG Was the Hot Commodity of 2022. This Year is Different.

 

LNG Was the Hot Commodity of 2022. This Year is Different.

 

The good times may be over for liquefied natural gas, at least for now.

The U.S. exported a record amount of the fuel in 2022 to help Europe replace gas that Russia stopped providing through pipelines. Companies that process and transport LNG profited as importers competed for their services. Stocks of big players soared, with Cheniere Energy (ticker: LNG) rising 48% on top of a 69% gain in 2021. New Fortress Energy (NFE) rose 76%.

But the trade has reversed in recent weeks, as LNG prices have fallen. Natural gas is used for heat, electricity and industrial applications, so warm weather in Europe has curbed demand for gas, and industrial plants are operating at reduced capacities as the economy slows there.

That has caused the benchmark price of European natural gas to fall to around $20 per million British Thermal Units, the lowest since September 2021 and about one-third the price in the middle of last year. The price had even touched $100 in August. U.S. natural-gas prices, which are lower than international prices because domestic supplies are abundant, have fallen to less than $4.

European natural gas storage levels now look likely to end the winter at about 50% of capacity, twice as high as last year, according to Morgan Stanley analyst Devin McDermott.

Prices had risen last year in part because importers were trying to outbid one another for cargoes. But the supply of LNG is growing faster now and buyers no longer have to compete as aggressively.

"Supply is likely to outpace new demand in 2023," McDermott writes. He expects producers to add 20 million metric tons of LNG capacity to the market while annual demand grows by just 10 million tons.

Chinese demand for LNG fell about 20% in 2022 as the country continued strict Covid lockdowns. Demand bounced back somewhat late in the year. By December, it was down about 12% on a year over year basis, according to Morgan Stanley.

Even as China reopens, it could take a while for demand there to return to previous levels, according to Rystad Energy analyst Kaushal Ramesh.

"The big unknown in this region is the reopening of China, but we expect energy demand to ramp up only later in the year, with lower cost sources of energy taking priority, which may limit upside to spot LNG demand," Ramesh writes.

For 2023, Morgan Stanley expects Chinese demand to rise 16% year over year. In India, demand may actually fall in 2023 as the power and industrial sectors switch to cheaper fuels, the bank predicts.

The drop in prices is likely to hurt the earnings of companies in the industry, McDermott writes. Given its current price expectations, Morgan Stanley expects Cheniere to earn $8 billion before interest, taxes, depreciation, and amortization this year, versus Wall Street expectations for $9.8 billion. New Fortress is likely to make $1.2 billion in Ebitda, versus expectations for $1.8 billion, the bank predicts.

Several stocks are already falling. Cheniere has dropped 6% in the past month. Golar LNG (GLNG) is down 8%, and New Fortress is down 13%.

Most analysts, however, expect LNG stocks to bounce back as the longer-term demand opportunity comes into view. The average price target for Cheniere is $207, versus its recent price of $152, for instance. While European demand will eventually fall off as renewable energy expands, Asian LNG demand is expected to rise for several years.



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