Thread by @JamieHeard5

Some tectonic shifts in the back of the LNG curve. 5yr+ contracts used to backwardate to US$6/Mcf; (we also spent some time at that price in the front back in 2019).

Some thoughts. 🧵

$6 long term LNG made sense if gas is abundant world. $6 LNG implies a ~$2.50 shale dispatch, or $3 Conv. If it was higher you could hedge it, drill your shale field, lock up your cargo and your return. Tokyo Gas Haynesville! Aka marginal cost of supply = $2.50 shale $6 floating

In 2021 we came to understand LNG demand is both stronger than expected, and holds far more upside risk than was previously priced in the forward strip. It's like the Brent "geopolitical risk premium" but instead its "don't freeze the Germans" premium.

https://twitter.com/SStapczynski/status/1486654814456934409?s=20&t=UT7tb0lvb4eBfVl_LmvJfw

This shocked near term S&D and has been written about at length... But the long term S&D is also strengthening which is very interesting because supply can actually respond to long term prices, while short term supply is pretty locked it (just can be reallocated)

I'm guessing on the S&D shifts but I think most would agree it's "D" leading the charge here on the change in long term view.

The new paradigm is asking for LNG 5+ yrs away at $9. This is a mix of risk premium, but also a potential change of opinion on the global marginal cost of supply. If producers need bigger returns to drill, they just got them. A US producer with a LNG contract can lock in >$5 gas.

This should give some pause... The market is offering 2027 LNG prices of $9 (HHUB ~$5.50). Liquidity in the market is thin but firm contracts are signed daily.

What growth do get in each jurisdiction? What returns do NAM shale producers generate (esp if they can't /don't grow!)

But... there is a disconnect. HHUB 2027 doesn't trade at the liquefaction + shipping discount of ~$3.50 to JKM. It trades at just over $3... The spread is wide and in this time frame is a capturable arbitrage.

The $9 price should incentivize a ton of FID's for LNG. That capacity should link the US and international markets. The marginal supply is 7 Bcfpd, a small % of the global market by then (10-15%?)

Result if you believe the current JKM mark and the implied global natural gas demand story.

2025-2030 NYMEX prices should jump from $3 to $5+
Gas NAV's and equity values effectively explode (2-3x)

Asymmetric bet of the decade in energy (in my view)