Broker warns Woodside Petroleum Limited is exposed to 2018 LNG glut

Oil stocks are sinking in sympathy with the miners today as commodity prices weakened in overnight trade. But a forecast glut in liquified natural gas (LNG) from 2018-2019 could put our favourite energy stocks under sustained pressure.

Macquarie Group Ltd (ASX: MQG) is predicting that the glut could last up to 2027 and that Woodside Petroleum Limited (ASX: WPL) is the most vulnerable stock in the sector to the oversupply issue.

This is because the broker doesn’t believe production costs from Woodside’s upcoming Browse LNG project will be low enough to be commercially viable under its LNG price forecasts.

What’s more, sales contracts for Woodside’s Pluto LNG joint venture are coming up for review before 2020 and a looming supply glut will give its Japanese customers the upper hand in any negotiation.

Macquarie’s bearish outlook for LNG is based on likely competing projects coming on line over the next few years as the US, Russia and Qatar ramps up gas exports.

This has prompted the broker to lower its long-term LNG price forecasts to US$7.50 per million British thermal units (MMBTU), which is substantially below the current price of around US$10 per MMBTU.

Further, the price could drop as low as US$4.50/MMBTU after the winter season in the northern hemisphere and the rise of renewables could dampen demand for gas.

Woodside isn’t the only one exposed to the LNG market. Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) are also in the firing line, although they aren’t seen to be as badly affected.

Having said that, Macquarie likes Oil Search due to the potential PNG LNG project development and thinks investors should switch out of Woodside for Oil Search.

However, not all experts are as gloomy as Macquarie even though there is general agreement about the market being oversupplied over the next year or so.

The Australian Financial Review reported that Shell, the biggest non-government linked LNG producer, is predicting a 50% increase in global LNG production capacity by 2020 but is predicting a shortage of the gas will re-emerge in the few years after.

Meanwhile, Singapore-based research firm Data Fusion was quoted as saying they do not believe there is an impending glut and that the market will only be slightly oversupplied as new plants will be slower to ramp up production than what some forecasters are predicting.

Also, Data Fusion thinks the strength of the recovery in demand for LNG is not properly appreciated by the market.

With questions over the outlook for LNG, there may be better investment options outside of the sector that are worth considering. The experts at the Motley Fool have found a number of growth stocks that are well placed to outperform in 2018.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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