Asian Spot Price Spike Effects Ripple Out

Copyright © 2021 Energy Intelligence Group

Spot LNG prices in the Asia-Pacific have surged nearly 80% in just three weeks as a laundry list of supply-side issues at LNG and gas facilities worldwide coincided with incremental winter demand (WGI Dec.9'20). Energy Intelligence assessments of spot prices for Northeast Asia deliveries up to two months ahead surged $3.35, or 39%, week on week to $12 per million Btu, its highest levels since November 2014 and the largest weekly gain since assessments commenced in 2010. The effects of the bull run could trigger discussions over issues like LNG commoditization, pricing and scheduling, market sources say. Spot Asian prices were at record lows as early as April but have experienced two price rallies since October (WGI Apr.29'20). The current Northeast Asia spot price has surpassed the previous high of $11.70/MMBtu assessed on Sep. 10, 2018, at the peak of China’s state-mandated coal-to-gas switching (WGI Jun.20'18). The new price ceiling is $12.60/MMBtu reached on Nov. 3, 2014, before supply from East Australia and the contiguous US flooded markets (WGI Jan.7'15). Imperfect Market The global supply issues driving the Asian price rally are numerous. These include depleting reserves, pipeline faults and poor gas quality in Southeast Asia; technical glitches at liquefaction plants in Australia, Qatar and Norway; unexpected weather-related output losses in the US; and shipping congestion at key Panama Canal (WGI Nov.4'20). At least one plant, Australia’s Gladstone LNG, has scheduled maintenance in January. In response, cargoes to Asia have been deferred, shrunk and/or canceled, creating unexpected short positions that portfolio majors, trading firms and producers have to cover by procuring spot cargoes. The Asian spot price surge is “not surprising” as “the market is just too short,” a source with access to Asian equity LNG said. Constraints in matching demand and supply has helped LNG prices rise, which is a sign that Asian market conditions remain considerably imperfect, a Singapore-based trader said. It is difficult to find LNG cargoes that suit specifications, regasification windows, shipping schedules and other requirements on prompt notice, so “buyers will have to pay up if they find one,” the trader said. It’s Getting Colder Colder temperatures in the Northern Hemisphere have further tightened markets. The latest meteorological forecasts indicate a higher likelihood of colder-than-average temperatures in Japan and South Korea in the month ahead. Northern China also faces harsher weather, market sources say. The weather has likely spurred several consumer buyers back into the spot market. “These end-buyers must have urgent demand ... if not, why will they show demand when prices are this high?” a second Singapore-based trader said. “That they are buying above oil parity and not rolling procurement to February and March indicates their demand is solid and market is tight.” Covid-19 Impact Limited The price impact of a third wave of the Covid-19 pandemic hitting Japan and South Korea has been limited. Both countries have imposed restrictions as cases climb but have been careful to avoid serious economic repercussions. These restrictions will be limited to commercial gas demand and are not expected to affect power generation and industrial sectors, sources say. Covid-19 restrictions are not expected to be as crippling as China's were earlier in the year as industrial gas demand has remained relatively untouched (WGI Mar.18'20). Japanese and Korean manufacturing and export indicators are, in fact, at the highest in years, propping industrial gas demand. Ripple Effects The Asian spot LNG price spike will have far-reaching consequences. Strong cargo markets will drive regional and global freight rates, particularly as the attractive Asian arbitrage keeps vessels in longer voyages. The congestion of the Panama Canal will also keep more vessels locked in charters as ships choose the longer Cape of Good Hope route. Asian LNG markets have shrugged off oil parity, with spot prices at a 23% slope to the current Brent price at $50 per barrel compared to a standard oil parity at around 17%. This could indicate that oil-gas price decoupling is well under way. Such strong volatility in the spot LNG price will likely provoke a reconsideration in term LNG scheduling versus spot, traders say. Buyers were likely too cautious in arranging term deliveries via new or existing contracts for winter, especially earlier this year when spot markets were weak. Market players were balancing projected needs against the desire to avoid oversupply if demand fails to match up (WGI Nov.4'20). Unfortunately for buyers, many term LNG prices have slumped to a discount to spot. For many contracts, especially legacy ones, sellers are unlikely to afford much flexibility for buyers to ramp up offtake, although this depends on individual arrangements. Long-standing issues on Asian LNG pricing will also likely be revisited, as “end-user buyers will not [be] happy” with the sudden price spikes, a Japanese buyer said. Such volatility, while rare, is not new -- it's just more visible as transparency improves, a trader noted (WGI Oct.14'20). Irwin Yeo, Singapore

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