Article by Tim Treadgold courtesy of Small caps.
Gas prices boom Russia energy market Ukraine oil
Gas has outperformed oil over the past 12 months.
Oil and gas might not be everyone’s favourite asset class, but when it’s the hottest ticket in town it’s hard to ignore – especially when potential profit-making anomalies emerge.
Geologists in particular understand the value in anomalies, or differences in layers of rock, which sometimes point to the presence of valuable minerals.
In oil and gas, the anomaly lies in the way gas, as traded in the US and other international markets, has significantly outperformed oil over the past 12-months.
One reason for gas rising faster than oil is overdue recognition that it is less polluting, fulfilling a role as a halfway house from oil and coal on the road to a renewable energy future.
Another reason is that Russia has turned itself into a pariah state by invading Ukraine. The invasion is destabilising the European gas market with some countries trying to wean themselves off Russian gas while Russia, in turn, is ceasing exports to other customers.
Positive factors powering gas’ price rise
With so many positive factors underpinning the gas market it’s easy to understand why the price of gas in the US, where there are few political impediments in commodity trading, has risen by 140% over the past 12-months – more than double the 60% oil price rise.
European and Asian gas prices have outperformed the US because much of the material consumed in those markets is imported, either by pipeline or shipped in as liquefied natural gas (LNG).
Australian gas prices, especially along the eastern seaboard, have also been trending up and look like rising further as demand outstrips supply, which is why Gina Rinehart, one of Australia’s richest people dived into the gas market last year as a partner with Korea’s steel giant Posco in the takeover of Queensland gas producer Senex Energy.
Rinehart’s move on Senex was well timed with oil trading around US$70 a barrel when it was first reported to US$105/bbl today.
Moving up with the oil price
Most other Australian oil and gas companies have moved up with the oil price, led by the top two, Woodside Petroleum (ASX: WPL), up 33% over the last 12-months as interest grows in its deal to acquire BHP’s (ASX: BHP) petroleum operations, and Santos (ASX: STO), up 12%.
Smaller oil and gas stocks have also moved higher, led by Vintage Energy (ASX: VEN), which has leapt up 60% to $0.096 thanks to it securing a sales deal over gas produced in the Cooper Basin, while Buru Energy (ASX: BRU) was up 10% at $0.22 after attracting interest in its Rafael gas discovery in WA’s Canning Basin.
But behind these local stock-market moves lies a much bigger event, which is the global hunt for gas supplies and the yawning gap between oil and gas prices which will eventually close because the two fuels do much the same job with one being a lot cleaner than the other.
Europe key to gas revival
Europe is the key to what’s driving the revival of gas especially as LNG with a stampede underway to replace Russian pipeline imports before a major shortfall in supply forces widespread closures in the European manufacturing sector.
Though running counter to a view that fossil fuels are a dying breed the opposite could be true for the next decade, and perhaps longer which is why the chief executive officer of Woodside, Meg O’Neill, last week renewed a call for mothballed Australian gas projects to be developed to help with gas supplies to Europe.
O’Neill told media outlets that taking Russian oil and gas out of the world market would have an extreme effect on the energy market.
“The ripples would be pretty far and widespread,” she said. “I think there is a tremendous opportunity. Australia has been a tremendous exporter of oil and gas for decades. There are resources discovered and not yet developed. Browse (off the north-west coast) and Sunrise (near East Timor) are two of them that ought to be given serious consideration.”
The suggestion that major new gas projects should be developed will attract a negative reaction from climate-change activists but with the war in Ukraine causing problems in Europe, it is possible to see international pressure being applied on Australia to help with the European energy crisis.
On top of the geopolitical consideration there is a “convergence” argument developing in the energy market with the gap between gas prices paid in Asia and Europe flowing over into the US and Australian markets.
Gas price warning
The New York-based commodity research firm of Goehring & Rozencwajg warned in a note to clients last week that a “global natural gas crisis gripping large swaths of the world is about to engulf North America as well.”
The core of G&R’s argument is that the price gap (the anomaly) between an Asian and European gas price of US$30 per million cubic feet and a US gas price of US$7.50/mcf is too great to be ignored and would lead to a convergence of price within the next six months.
“The convergence of US and international gas prices will come out of nowhere and take all investors by surprise,” G&R said.
For Australian investors the most obvious entry point into the international gas market is via the major LNG exporters, Woodside and Santos.
But flying below the big boys are smaller producers selling into the international market through gas supply deals with the LNG producers and others looking for ways into the global market.
Beach Energy (ASX: BPT) will be first of the mid-cap oil and gas companies to plug directly into the international LNG market through a deal which will see gas produced at the co-owned Waitsia gas field in WA with Japan’s Mitsui converted into LNG at the Woodside run North West Shelf LNG project – in which Mitsui is a minority partner.
Buru hopes to follow Beach, piping some of its gas in the Rafael discovery to the North West Shelf to “access the high value LNG market.”
Other Australian gas producers will also be looking for ways to get a slice of the global gas market where prices are up to four-times what can be earned locally and while not easy the pricing anomaly is an enormous incentive to try and find a way in.
Gas-price convergence is not yet a widely discussed market event, but it will happen in the same way oil is traded either as Brent (European) quality or West Texas Intermediate (the standard US measure).
