The slow decline in the oil/natural gas ratio that has persisted through the year continues – this time oil is falling faster than natural gas as both are reacting to slower demand or expectations of slower demand. We are unconvinced that the price declines will continue, but it is much less clear which direction the ratio will move. OPEC+ has far more chance of keeping cash flows high by trimming volume to balance the oil market and the overwhelming strategic logic of such a move means that it is a likely path – there is no 10-20% boost to demand to be found by lowering prices. US natural gas is still on a medium-term demand march higher in our view and more limited E&P spending should keep the market balance quite tight. There are no near-term large increments of new LNG capacity on the horizon and consequently, inventory and pricing will likely bounce around on weather changes for a while. See more in today's daily report.
The commentary on oil reflects the opposing views that OPEC+ capacity is looming and that every piece of incremental negative demand news is frightening, versus that OPEC+ is disciplined and wants higher prices, resulting in every incremental positive being welcomed. We are firmly on the side of higher oil prices as we cannot see any stakeholder in oil wanting anything except opportunity profits for as long as it may last from here.
As we anticipated (and have covered at length in our ESG and Climate service), we see a renewed increase in adding more US LNG capacity as global markets tighten again and as more emerging economies see LNG as a cleaner and potentially cheaper path to broader electrification. There is also talk of changing contract structures to share the pains and gains of LNG price volatility. This would be good for the buyers and is likely to generate more importer interest, but it will challenge some of the independent projects from a financing perspective if more variable price components become the norm in contract construction – this could create a competitive edge for the oil majors over the independents, as they would have less trouble raising the investment funds. One of the enabling factors of the early LNG projects was the fixed nature of contracts and the ability to lock in a largely fixed return for both equity and debt investors.