I was last in Doha in 2008. Back then Qatar was still aspiring to leverage its wealth in all sorts of areas. At the time it was hosting a major golf tournament and had yet to unveil bigger plans to host the football World Cup. To the visitor, while Doha had some nice buildings you could go look at, there was little else. As one of my hosts pointed out as we were marveling at all the shiny new skyscrapers:
“Ask yourself this – where is everyone going to park their cars?”
Nobody was building car parks for the presumably thousands of office workers that would be housed in these buildings. That is Qatar in a nutshell. The emirate has risen to prominence on the basis of its truly massive natural gas supplies, but is still a young nation. Liquid natural gas technology allows it to ship its product globally. And the money this yields provides for all the fripperies it needs to make itself feel like a developed nation, from golf tournaments to skyscrapers to its own international news network, Al Jazeera. The presence of a large US military base on the peninsular contributes to its sense of security in a region where there are a remarkable number of ongoing conflicts.
Last week Qatar ran into severe diplomatic problems with its neighbours, ostensibly over its ongoing support for extremist groups. Saudi Arabia and the US in particular have become concerned about the emirate’s backing of groups like the Muslim Brotherhood. Severing diplomatic relations has allowed many of its Arab neighbours to place pressure on Qatar. The move was unexpected, but given Qatar’s importance to the global natural gas market, this could also have serious repercussions to the natural gas market.
“It is difficult to see any solution other than a climb down by the Qataris,” says Menas Associates, a strategic political and risk consultancy. “The Saudis and Emiratis may feel that, if they apply sufficient pressure, and the Emir of Qatar refuses to submit, then there could be a move from within the very large Al Thani ruling family to unseat him. Teo recent emirs – including the current emir’s grandfather who was removed by his father – were removed after family coups.”
There has been plenty of coverage about the implications for the UK’s energy security, given that the country has now become more dependent on overseas imports, rather than its own North Sea fields. About 17% of UK gas supplies come from liquified natural gas (LNG), with much of this coming from Qatar. And the UK is not the only country facing this predicament.
Since the diplomatic rift opened, Qatar’s gas shipments have continued, despite the obvious logistical issues created by the closure of access to Gulf ports. In addition, output from other international markets is set to increase – look to rising output from US and Australian fields in the next five years. That’s before we factor in the output from Russia or the possibility of developing more shale fields.
So how has the gas futures market been behaving?
Is there going to be a squeeze on European gas supplies this winter, perhaps compounded by problems in the Middle East? This month US supplier Cheniere Energy landed its first shipments of American LNG in the Netherlands and Poland as American suppliers sought to exploit fear of Russia in key European markets.
The LNG spot price has plateaued in the last few days, staying just above $3. It had been on a steady run down from the 3.40 mark which was its peak price in the last three months. The market looks perfectly capable of going down as far as $2.50 before the cold weather sets in, after which we expect it to rally.
It is important not to lose sight of the global situation. According to Stratas Advisors, global dry natural gas production grew to 328 billion cubic feet (Bcf/d) per day, an increase of 1.6 Bcf/d compared with the last quarter of last year. Several big projects are expected to come online in Q2, including Chevron-operated Wheatstone, and Julimar’s offshore Woodside project, near Australia.
The diplomatic issues in the Gulf have traders in the LNG markets on edge: what, for example, would happen if Qatar hit back, and stopped shipping gas to markets like the United Arab Emirates, which still needs it? The UAE consumes 1.8 billion cubit feet per day of Qatari gas via the Dolphin pipeline. Any tit-for-tat action here would quickly create ripples through the LNG market. This is a factor investors need to consider before we hit October. Could we see some irrational short term buying of LNG contracts, regardless of the global fundamentals? Hell yeah!
The developing situation in the Gulf is far from simple: at the moment the markets seem calm, but it would not take much to set them off, especially as analysts are now focused on Qatar. Short term, intraday moves may be best exploited by using contracts for difference (CFDs) or futures. If you want to ride the gas price on a longer term period, then the ETF market is another option. These track the performance of specific commodities markets, like gas, but can be traded like a share.
Good examples include ETFS Natural Gas or the Boost Natural Gas ETC (Exchange Traded Commodity). The biggest on the market is VelocityShares 3x Natural Gas ETN (UGAZ), which is levered three times, meaning it provides three times the gains, or the losses, from its underlying index, in this case the S&P GSCI Natural Gas Index Excess Return Index.