In the real world, markets are imperfect and equilibrium conditions, where supply and demand are evenly matched, exist only for short periods. Market factors are always responding to stimuli and periods of oversupply or undersupply are the norm. Market prices are signals which reflect the prevailing market conditions.
In tight markets where demand is greater than supply, if prices remain high for long periods, they encourage investors to add new capacity which has the effect of reducing prices.
The reverse is also true. Market responses happen with a time lag as there is a lead time to add new capacity. All markets behave this way, foreign exchange markets included. Given globalisation, prices in any geographic region will reflect price movement elsewhere. This scenario explains the sharp rise in the oil and natural gas prices after the reopening of economies in the post-COVID period.
The war in Ukraine added to the market instability in 2022 and prices moved sharply upward. In the two years since then, world natural gas output has increased in response to the higher prices. Unfortunately, world economic growth has slowed and this winter has been milder (when demand for heating should have been higher) whilst gas output has increased in the rest of the world. Climate change has led to warmer weather, meaning milder winters which has meant lower gas usage.
Natural gas output has stagnated in T&T. The United States has become the largest producer of natural gas and now accounts for more than 25 per cent of the world’s production or approximately 105 billion cubic feet (BCF) of gas a day. By comparison, T&T’s natural gas production is 2.6 bcf.
On Friday, February 16, Henry Hub gas prices fell to the lowest closing price since 1995 at US $1.60 per MMBtu. This has resulted in a gas glut and rising inventories as supply has outstripped demand. If these market conditions persist, it will lead to plant closures as in T&T in 2018. One might argue that this situation only applies to the US market, and the rest of the world is short of gas. However, sluggish market demand has also driven down prices in other parts of the world. In Europe, prices for contracts traded on the Intercontinental Exchange have fallen by 22 per cent this year and contracts trade at $7.90 per MMBtu or 90 per cent less than the 2022 prices.
The same is true for northeast Asia where the prices of liquified natural gas have fallen by 23 per cent to 2021 levels. These price movements are evidence of a market imbalance. Some LNG plants will close and others will experience operating losses. The carry trade to Asia may still benefit T&T LNG. It is worth remembering that T&T is now a high-cost producer, and the margins will be smaller. This simply adds to T&T’s difficulties. Since natural gas production has declined, LNG output will stagnate. Petrochemical output will also be affected. For example, last week this column noted that from September 2024 Methanex will be using its smaller plant, Titan and its larger plant, Atlas, will be closed. Methanex’s capacity utilisation will now fall to 45 per cent down from 55 per cent in 2023 provided that it is supplied with enough gas to keep the Titan plant fully utilised.
T&T’s positive economic outturn for 2021-23 was due mainly to international price increases associated with natural gas and its derivatives. The market prices for LNG and petrochemicals suggest that T&T’s economic growth projections may have been too ambitious.
Economic forecasts are not perfect as market conditions change and those forecasts were built on output and price assumptions which are no longer valid. Now that prices have declined, the economy will return to the same weak performance it exhibited between 2017 and 2020. The performance of the National Gas Company (NGC), the national economic flagship, is a rough guide to the possibilities.
Readers should note the inconsistency and volatility in the NGC’s reported profits. Between 2018 and 2022, NGC reported a profit of $2.2 billion in 2018, a sharp reduction to $482 million in 2019, a loss in 2020 of$2.1 billion, and a profit of $2.5 billion in 2021 and $2.4 billion in 2022.
Interim results for 2023 are not available on the company’s website. If the company follows its normal reporting cycle we will not know the company’s performance for the next six months. Of even greater interest is the sharp revenue variations. Reported revenues in 2018 were $16 billion and $13.6 billion in 2019. In 2020 the company reported a $2.1 billion loss from revenues of $11.4 billion. In 2021, revenues increased to $23.6 and increased again in 2022 to $33 billion.
Despite the $10 billion revenue increase in 2022, profits fell from $2.5 in 2021 to $2.4 billion in 2022. A profit of $2.4 from $33 billion in revenue in 2022 does not compare well with a profit of $2.2 billion from revenues of $16 billion in 2018.
The volatility in NGC’s revenue and profits demonstrates the riskiness of relying on one sector to drive the country’s economic performance. This has implications for government revenues and the maintenance of a sustainable expenditure path. Planning growth and development based on a volatile revenue source is not prudent. Therefore managing public expectations is critical in maintaining investor confidence. What goes up will come down.
Mariano Browne is the Chief Executive Officer of the Arthur Lok Jack Global School of Business. ALJGSB is a not-for-profit corporation.
