Shell Surges on Asia's Missing LNG Demand, But Prices Must Fall

Shell's stock surged by approximately 2.5% to $98.945 on Tuesday, marking a significant gain in the global LNG market. The increase is largely due to Asia's missing demand for liquefied natural gas (LNG), which has been estimated at around 36 million tonnes this year.

The shortage has caused Asian spot LNG prices to nearly triple, reaching around $30 per million British thermal units. This has forced price-sensitive buyers in China, India, and Pakistan to rely on coal and oil instead of LNG. However, high prices can ultimately destroy the demand that producers need to recover.

Shell estimates that two full quarters of its latest LNG sales volume have disappeared due to the disruption. Despite this, the company's second-quarter results showed 18 million tonnes of LNG sales, $9.8 billion of adjusted earnings, and $21.4 billion of operating cash flow. Free cash flow reached $17.5 billion.

The valuation picture indicates that investors are already paying for part of Shell's advantage. The company's share price is 19.54% above its GuruFocus GF Value estimate of $82.77, signaling that the market values Shell well ahead of its historical fundamentals-based benchmark. However, the next leg of the story depends on whether LNG prices eventually fall enough to bring Asian buyers back without crushing the margins that made the shortage so profitable.