Dear Foolish readers,
As I'm writing this, the Liquefied Natural Gas Ltd (ASX: LNG) share price has shed no less than 10%.
The company was the ASX's wonder stock of 2014. The stock soared 1,685% between January 2014 and April 2015, maxing out at $5.00 around that time.
It's trading at $2.47 now, although it hit a low of just $2.22 earlier in the session.
At that point, it was down 19.3% for the day.
For those of you scouring through the ASX for any news reports from the company that could explain today's severe plunge, don't bother – the company didn't release any news.
Instead, the fall can likely be attributed to the heavy fall in oil prices overnight.
Brent crude, which is the global benchmark, shed 3.9% of its value to just US$46.90 a barrel, while West Texas Intermediate, considered the US benchmark, dropped 4.3%.
The latter hit a low of US$40.60 a barrel overnight, the lowest since March 2009, although it soon settled around the US$40.78 mark.
The problem is, conditions are expected to worsen still.
According to The Australian Financial Review, Citigroup says a price of US$32 a barrel is a 'conceivable reality'.
It's hard to argue with them, based on the massive supply and demand imbalance already existing in the global market. Throw in the fact that Iran is expected to boost exports soon too and oil prices could definitely have further to fall.
The market certainly seems to believe it, punishing stocks in the energy sector left, right, and centre.
Woodside Petroleum Limited (ASX: WPL), for instance, is down 2.6%, while Santos Ltd (ASX: STO) is down 5.4%.
Then there's Senex Energy Ltd (ASX: SXY) and Origin Energy Ltd (ASX: ORG) which have plunged 8.1% and 10.8%, respectively.
'But what's this got to do with Liquefied Natural Gas?' I hear you ask…
What some investors don't realise is that international shipments of liquefied natural gas, or LNG, are generally price-indexed to crude oil.
In other words, falling oil prices typically lead to a comparable drop in LNG prices.
The beautiful thing about Liquefied Natural Gas, the company with the ticker code ASX:LNG, is that it won't assume any commodity price risk once its Magnolia and Bear Head LNG projects are in operation.
It'll simply charge a flat fee per unit, and watch as the cash rolls in over the lifetime of its contracts.
The danger however, comes before that.
Falling oil prices could mean that cheap shale gas from North America will no longer be able to compete with existing supplies in the key growth markets throughout Asia.
What this means is that Liquefied Natural Gas might struggle to turn non-binding agreements into binding toll partners.
Sure, it's already signed one such agreement for its Magnolia project – a 20-year contract with the option of a five-year extension – but it'll need to sign more to justify its current share price.
And that could become a whole lot more difficult if the oil price continues to fall – especially if it drops another 20% like Citibank seems to think it will.
For now, the stock looks like one for the watchlist, and only for the watchlist.
