The Edge of a Global Energy Disruption

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Oil & Gas

We’re witnessing a major shift in the global energy markets.

It’s one that’s been brewing for the last couple of decades. But it’s started to pick up steam recently.

It’s one of the fastest-growing markets in the energy space. And in recent years, we’ve seen records broken as new countries – including the U.S. – entered the market.

We’re racing toward a tipping point in the global liquefied natural gas (LNG) trade. And the growth we’ve already seen is just the tip of the iceberg…

A 250% Increase in Importers

Last year, global demand for LNG hit 265 million tonnes. That’s up 8.3% from 244.8 million tonnes in 2015.

Even though LNG prices have declined in recent years as Japan’s nuclear sector has started to come back online, more players have been entering the global LNG trade.

As a result, demand has increased… more supply has come to market, and new buyers have quickly sopped that up.

In fact, Australia, the world’s second-largest LNG exporter behind Qatar, saw exports increase 51% in 2016 to 44.3 million tonnes. And the U.S. joined the party with a record export year of 2.9 million tonnes.

Since 2015, Colombia, Egypt, Jamaica, Jordan, Pakistan and Poland have entered the LNG importing business. That means, since 2000, the number of LNG importing countries has gone from a mere 10 to 35 – a 250% increase.

And these new markets are thirsty for LNG.

Along with China and India, these countries are expected to be the big drivers of LNG demand in the years ahead.

For instance, in 2015, Egypt was the first African country to import LNG. It was also the fastest ramp-up of any LNG importer ever, from 2.8 million tonnes in 2015 to approximately 6.6 million tonnes last year.

In 2016, China and India increased their LNG imports by a combined 11.9 million tonnes. Meanwhile, Egypt, Jordan and Pakistan increased theirs by a combined 13.9 million tonnes.

These are the growth markets in the near term.

Here’s the deal… Over the next three years, LNG shipment volumes will increase at least another 32% from their 2016 levels.

And from 2015 to 2030, according to Royal Dutch Shell (NYSE: RDS.A), LNG demand will increase at 4% to 5% per year. That’s double the 2% growth rate of global natural gas demand.

All of this is because of increasing energy demand and a shift away from older energy sources…

One Commodity’s Death Is Another’s Gain

The biggest boon for natural gas and LNG is the slow death of coal.

I know and understand there are people who love coal. I lived in a small (extremely small) town in West Virginia. It’s a way of life and a legacy. But its use in the U.S. has been on the decline since the 1990s. And the true final nail in the coffin is that China is shifting away from coal.

This is why from 2015 to 2030, global natural gas demand is expected to increase 45%…

China – far and away the largest coal producer and consumer – is cutting its coal use. In 2015, natural gas supplied 5% of the country’s total primary energy demand. By 2030, this will more than double to 11%, almost all that gain being taken away from coal.

During that same span, China will go from consuming 4% of global LNG to 16%.

The Asia-Pacific region is the main market for LNG. Japan, South Korea, China, India and Taiwan are the top five largest LNG importers in the world.

Which is why Australia is banking its future on LNG.

In Asia, LNG production – led by Australia – is expected to increase 16% this year to 127 million tonnes. But demand will grow 6% to 195 million tonnes. And the two biggest demand drivers are that India is projected to increase imports by 28% while China increases imports by 38%.

The Disruptor From the U.S.

There are several global LNG plays for investors to look at. But there aren’t many that offer growth opportunities like those from the U.S.

In February 2016, Cheniere (NYSE: LNG) became the first continental U.S. company to export LNG.

As you’re aware, the U.S. has a massive supply of natural gas. And our plan is to disrupt the global LNG market by tapping into that. In fact, by 2020, the U.S. is expected to represent 14% of global LNG capacity.

The leading edge of this move is Cheniere.

And over the past year, shares of Cheniere have far outperformed the broader market as well as the energy sector, as reflected by the Energy Select Sector SPDR (NYSE: XLE).

That has to do with fundamentals… and revenue growth we often see only from biotechs or small cap tech companies.

Revenue for Cheniere is expected to increase 762.9% in the fourth quarter of 2016 and to be up 393% for the year. Cheniere’s revenue is expected to be up 862.6% in the first quarter of 2017 and to be up another 164.5% in the year ahead.

And like I said, Cheniere is just the leading edge. Sempra (NYSE: SRE) and Dominion (NYSE: D) will ultimately join Cheniere in the global LNG market. Sempra’s Cameron LNG is expected to begin operating in 2018 and record its first year of operations in 2019. Dominion’s Cove Point is one of the oldest LNG import terminals in the U.S.; it should start exporting later this year.

The great thing about U.S. LNG exporters, like Cheniere, is that they’re at the beginning of their disruption. There’s a lot of upside ahead.

LNG is the fastest-growing natural gas market. Plus, it has the most upside, expected to grow at more than double the pace of the natural gas market over the next decade.

It’s here where energy investors will profit most in the months and years ahead.

Good investing,

Matthew