Material Matters: Oil, LNG And Thermal Coal

Commodities | Aug 07 2018

A glance through the latest expert views and predictions about commodities. Oil; LNG; thermal coal; and Oz energy stocks.

-Looming Iran sanctions create uncertainty in oil market
-China increasing its share of Australian LNG exports
-Strong seaborne thermal coal prices expected to ease
-Further upside on offer for Oz oil stocks


By Eva Brocklehurst


An over-compliance with OPEC production cuts and run up in oil prices came to a head in June. Commonwealth Bank analysts observe, after a meeting between OPEC and allied producers, oil prices have started to fall as pressure was placed on this grouping to boost output to rebalance markets.

OPEC and Russia are estimated to have added around 1% of global supply in the last two months. Yet the analysts expect the oil price will start lifting again, once this increased supply is absorbed and as US actions against Iran take effect.

Still, there is uncertainty about the extent of any sanctions amid the possibility of a meeting between US President Trump and Iranian President Rouhani. Citi believes the 90 days to November 4, when sanctions are expected to be fully in place, are critical for oil markets as prospects for a sharp reduction in Iran's oil exports confront acutely low spare capacity within OPEC.

The broker observes, so far, the US has not dangled any "waivers" as an incentive, making it very uncertain as to how much oil will be taken out of the market. The broker suspects China, Turkey and Iraq could provide additional avenues for Iranian oil. China appears to be in a good position to raise imports from Iran because of growth in refining capacity and an incentive to internationalise its currency.

Macquarie raises its 2019 Brent forecast to US$68/bbl on the back of the sanctions potential. Sanctions are expected to reduce Iranian exports by 1.1mmbpd. Other positive aspects to prices include increased refining runs, challenges in Venezuela and disruption risks in Libya and Nigeria.

Despite this, Macquarie expects sizeable supply responses from Russia and the US will offset production losses and create a 2019 global surplus of around 412,000 bpd. The broker is also concerned that economic-driven demand may be peaking amid exposure to both higher prices and softer currencies.


Japan's dominant share of Australian LNG exports has fallen, as China expands and claims the greatest share of growth in Australian output since 2015. Chinese demand reflects plans to boost gas as a share of electricity production to 8.3-10% in 2020, from 5.3% in 2015.

Pipeline imports from Russia together with Chinese domestic gas output may eventually stem the demand for Australian exports but Commonwealth Bank analysts suggest there are many factors which could affect this.

Environmental protection policies have compelled China's provinces to switch to gas from coal for heating and this has boosted LNG imports. Japan's power sector, is also expected to consume less gas as nuclear power is restarted.

This restart has been slow in coming, as just nine nuclear reactors have restarted since the Fukushima disaster in 2011 and another 17 have applied for restart. The analysts suspect a strong emphasis on renewables is also likely to weigh on Japan's LNG imports.

Thermal Coal

Spot seaborne thermal coal prices have lifted sharply over the past four months and are now at the highest level since March 2012. On the demand side electricity output has lifted in China by 8.3% in the first half and thermal power generation accounts for around 75% of China's total electricity output.

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