LAUNCESTON: Asian buyers of liquefied natural gas may come to view the plunge in oil prices as a case of be careful what you wish for, as you may get it.
For several years Asian LNG consumers have been keen to see an end to the long-standing practice of linking the price of the super-chilled fuel to crude oil, most often with a sliding scale referred to as a slope.
The buyers have argued that this exposes them to rising crude oil prices that have little bearing on the price of extracting and chilling the gas. In other words, LNG producers have been gaining at the expense of consumers.
This has been the case in recent years, given the steady rise in oil prices, with only a brief reversal in the wake of the 2008 global financial crises.
But with Brent crude down some 60 percent since the middle of 2014, and the prospect of weak prices for many years to come, oil-linked LNG isn't looking as bad an option as it was.
Certainly, the weaker oil prices will already be reducing the price paid for LNG, but the real issue for LNG consumers is whether they believe the current situation is a structural change, or merely another temporary reversal.
If low crude prices do persist for several years, then sticking with longer-term oil-linked contracts could be the best way to ensure reliable supplies at a relatively low cost.
However, if oil prices do recover strongly, then the push to short-term contracts linked to other global gas benchmarks such as the UK's National Balancing Point or the US Henry Hub will make more sense.
It's virtually impossible to accurately predict where oil prices will go. All that an analyst can reasonably do is assess current trends and make forecasts based on these trends continuing.
Currently this means that oil prices will likely remain below $100 a barrel for an extended period, especially if major swing producer Saudi Arabia continues its policy of not surrendering market share in order to boost prices for the benefit of rival producers.
Even if US shale oil and other higher-cost crude such as Canadian tar sands and deep offshore wells are forced from the market, they will come back as soon as prices recover.
Given the uncertainty of where oil prices will go in the next few years, the temptation for LNG buyers will be to stick to their current campaign of trying to end, or reduce, oil-linked prices.
They will also be seeking to use more short-term contracts, end restrictions such as destination clauses and encourage price flexibility.
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