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OPEC production cut could hit LNG market if prices keep rallying

LNG market

Big buyers in the LNG market have benefitted since 2014 from the oil price slump.  Following the OPEC output cut deal, LNG prices may soon be on the rise along with crude. MarineTraffic.com photo by Pietragala Geraldo.

LNG market may see upswing in prices if crude price rises

By Aaron Sheldrick

TOKYO, Dec 2 (Reuters) – The oil output cut announced by OPEC could impact the LNG market, if crude oil prices keep rallying, a senior executive from Japan’s JERA Co, the world’s biggest buyer of the fuel, told Reuters.

Big LNG buyers in Japan, which takes in about a third of global shipments of the fuel transported in liquid form, have benefited from the slump in crude since 2014, due to the link on many long-term contracts for gas to oil prices.

“It is going to take more than one announcement to have a big impact,” Hendrik Gordenker, chairman of JERA, told Reuters in an interview on Thursday.

That said, “if the (crude) price is too high then the consumers of natural gas priced based on oil¬†are paying a lot of money and it may be difficult for them to survive well, so not a good thing for the natural gas business,” he said.

Japan and other countries including South Korea have long complained about the link to oil for long-term contracts, which have traditionally been priced in Asia in reference to what’s known as the Japanese Crude Cocktail (JCC) price.

That is changing as new sources of supply have come to market such as U.S. shale gas, which is usually priced based on piped gas prices, but many contracts still have the oil link.

When oil prices were high that hit buyers hard, particularly in Japan after the Fukushima nuclear disaster of 2011 shut down reactors and forced them to switch to LNG to produce electricity.

Oil prices have rallied strongly since OPEC announced its production cut to end the market glut that has kept prices down.

(Reporting by Aaron Sheldrick, editing by David Evans)

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