Something immediately clear about energy traders is that they are overwhelmingly young.Trading is a business where if don't make enough money to retire after a few years,you probably got fired long before.

 A story comes to mind as we see traders ramping up near term oil and LNG curves based on a risk premium stemming from perceptions that if the Straits of Hormuz are bottled up,so too will be the gas production of the largest LNG gas exporter Qatar.  

I remember being on a plane from New York to London in early 1991 when we were woken half way over the Atlantic for the pilot to make an emotional announcement that the war to liberate Kuwait had started.That happened because this was a Kuwait Airways flight. Because of course, not all KA flights had been on the ground at home, leading to an airline in exile that kept on flying.That also made KA flights insanely cheap which explained my presence.

Similarly,today only a half dozen or less LNG tankers would be bottled up in the Gulf.  

Traders gut reaction will be to ramp up prices as ruthlessly as they pumped up LNG even before the first waves hit the shore in Japan last March 11. Just as inevitably, some end users will panic and fix prices at the peak. In the UK, we can expect that Centrica and the rest will just as suddenly raise gas and power prices to domestic users.But the reality is that a couple of weeks later, cooler heads will prevail and here's why. First, a breakdown of LNG supply and demand from the International Gas Union:

 lngexports

Qatar obviously plays a dominant role in LNG. But world LNG trade is currently priced both on supply and demand of LNG, and tankers. The problem is not a shortge of gas but of shipping capacity. With 20 day voyage times from Qatar to some locations, the overwhelming majority of the fleet now tied up in the Qatar trade will be thousands of miles away from hostilities and actually could end up far closer to locations with spare capacity: Norway,Oman,Yemen, Peru, Equatorial Guinea, Algeria, Egypt and Trinidad will all be able to ramp up production to take advantage of freed up shipping capacity. Most of those locations are actually closer to Europe. It's hard to mention logic here in a market based on emotion, but logically we should also see a fall in both shipping rates per day and the number of days per voyage. They'll make some money for sure, but  things won't be anywhere nears as bleak as traders try and make out. Perhaps I'm hard on traders.The reality is that if they are trying to scare people, they need willing victims and suckers are born every minute on the demand side here in Europe. Closing the Gulf could be potentially disastrous, but not necessarily catastrophic.The key advice is to resist the urge to give in to predictions. 

I hope no one will ever need this advice,but it's even useful now for those considering buying on the curve. Don't get talked into scare scenarios by people with theoretical, not actual, experience.

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  • Andy

    Isn't the consensus that Qatar has the cheapest-cost natgas in the world? Any disruption to the Persian Gulf and those LNG tankers would be getting higher-cost natgas and delivering it to customers at lower profit.<br /><br />I saw your tweet about the Illinois New Albany Shale and I went, "Yes!" Over Christmas I drove home and took a shortcut through Wayne county Illinois and I saw a lot of what looked like to me small-scale oil drilling. There was no evidence of fraccing operations that I could see, but there were a bunch of nodding rigs, and more heavy equipment than you would expect on rural Illinois roads. BTW, there was some drilling in Indiana too.

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  • Mark

    In reply to: Andy

    That depends on what extent you believe the price is cost-based. The same LNG suppliers were happy to ship gas at lower prices in 2009/10, including LNG from the "higher cost" suppliers.<br /><br />If the supply demand balance is tightened (through shipping or supply constraints) the price is likely to go up. If on the other hand the constraining factor remains the same (e.g. ships), there should be little impact. It may of course be a little more complicated because some of the biggest ships have a limited number of berthing points and hence there may be less flexibility in the supply chain

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  • I'm starting to think that any Hormuz closure is unlikely. Every boat in the Iranian Navy is monitored constantly by a number of other navies. One thing for sure is that any closure would be very, very short lived. But it's all risk premium to traders and the price is set at the margins, no matter how far fetched some of those scenarios may be.

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  • On the security theme, there is an interesting article by Alan Riley posted on Natural Gas Europe. He makes the point that the Americas are on their way to oil independence and it is conceivable that even the US itself could become self-sufficient.<br />If/when that scenario arrives, Europe - together with China and India - could be on their own when it comes to retaining access to mid-East oil and gas.

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  • Maybe Murdoch's lawyers won't notice but I do: That post was originally published, behind the pay wall, of the Wall Street Journal.

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  • Its on the WSJ website as well - no paywall.

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