What: Crude oil prices have sunk close to US$78 a barrel on news that Saudi Arabia, the largest exporter in the OPEC cartel, will lower its prices for US customers. Oppositely, it raised prices for Asia and Europe.
Already there are some estimates that the world oil supply is in excess, putting downward market pressure on prices. Due to the huge shale oil industry expansion in the US, that country's demand for oil imports has been lessening, so exporters are in surplus.
So What: The Saudis may want to protect their market share and push oil prices low enough to blunt the growth of US shale oil, which becomes less economical to develop as oil prices decline.
What will be the effect on Australian energy producers?
Share prices for the energy sector majors are down over the past two months, but those decreases are in line with the general market sell-off the S&P/ASX 200 Index (ASX: XJO) (Index: ^ AXJO) has experienced.
In some ways the Saudi move could actually help Australia. With the respective LNG projects of Santos Ltd (ASX: STO), Origin Energy Ltd (ASX: ORG) and Oil Search Limited (ASX: OSH) either starting or close to starting within a year, one concern was the US entering into the LNG export market and bringing down prices.
Australia has high production costs, so if the current LNG prices went too low, then the profit projections of some of these projects could be lessened. The PNG LNG project (which Santos and Oil Search have stakes in) has all current production capacity under contract, so those profit projections won't change.
Lower LNG export prices can also make off-take contracts more difficult if buyers like Japan and China know they can get a cheaper price somewhere else.
Now what: LNG prices are based on oil prices, so a prolonged oil price decline could affect uncontracted supply. For example, Woodside Petroleum Limited's (ASX: WPL) Browse project doesn't have 100% of its production capacity under contract.
Currently, it isn't a serious problem and may be only a temporary situation. Oil prices have ranged between $80 – $110 a barrel several times over the last three years, so it is nothing new. Investors should focus more on when the various LNG projects will start exporting and watch how their new cash flows can expand future production further.
