LNG May Replace 120,000 Barrels a Day of Oil, JPMorgan Says

By Robert Tuttle - Nov 4, 2010 3:17 PM GMT

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Liquefied natural gas may displace as much as 120,000 barrels a day of oil through 2015 as new Qatari LNG supplies are used to heat homes and fuel power stations in some countries, analysts at JPMorgan Chase & Co. said.

“If the Qataris selectively seek out higher priced Asian markets or emerging markets in Latin America or the Middle East, it is likely they will impact global oil demand growth,” Lawrence Eagles, David Martin, Jeff Brown, Sung Yoo and Ryan Sullivan wrote in a Nov. 1 report. LNG is natural gas chilled to a liquid for transport by ship rather than pipeline.

Qatar, the world’s biggest LNG producer, plans to increase annual production capacity to 77 million tons by next year, equal to 1.9 million barrels a day of oil, JPMorgan said. About 30 million tons a year of Qatari LNG production capacity, equal to 740,000 barrels a day of oil, isn’t tied to long-term contracts and can be diverted to higher-priced markets.

LNG sold under long-term contracts is priced in relation to oil while fuel sold on the spot market more closely reflects the price of gas. Oil has risen 94 percent since the end of 2008, reaching $86 a barrel today, while U.S. gas has dropped 33 percent and U.K. gas has fallen 18 percent.

Kuwait has received Qatari LNG that was probably substituted for oil in power generation, JPMorgan said. Brazil is taking 5 LNG cargos a month through November and Argentina and Chile are increasing purchases of LNG, which may help cut consumption of gasoil.

“In every one of these cases, the wide price differential between oil and spot LNG is cited as the key driver, which implies oil substation is taking place,” the analysts wrote. “LNG has the best ability to ‘act’ like oil in that it can be moved long distances to the markets where it is needed and prices are highest.”

Asian markets consumed 28 percent more LNG in August than a year earlier, JPMorgan said. Fuel helped limit the use of oil in power generation and may have cut crude consumption by as much as 150,000 barrels a day.

“It may well be that flexible LNG supplies take some of the ‘stress’ demand for oil out of the equation and reduce some accelerated growth potential for oil,” JPMorgan said.