Asian spot liquefied natural gas (LNG) prices continue their upward trajectory, reaching seasonal highs not seen since mid-2014 when global oil prices were trading over $100 per barrel. This time, however, spot prices aren’t spiking on the back of exorbitantly high global oil prices but come as buyers in North Asia compete for cargoes with Mexico and Egypt amid supply outages from global producers.
Production setbacks in the United States, Australia and Malaysia also tightened supply, while recent LNG trading volumes in Asia have also been supported by the restocking of depleted inventories by South Korean and Japanese utilities after an unseasonably cold winter.
Spot-LNG refers to LNG that is traded on a cargo to cargo basis, and does not mean term
contracts of LNG (so-called long, medium, and short-term contracts). Long term LNG contracts are priced to an oil-indexation formula thus are more sensitive to swings in global oil prices than spot prices. However, spot prices are also affected to some degree by changes in oil prices.
Spot LNG prices for July delivery in North Asia spiked some $1.80 per million British thermal units (MMBtu) last week to settle at $11.60/MMBtu – a massive increase for the super cooled fuel and a seasonal four year high. This time last year prices hovered just under $6/MMBtu.
Sharp price gains forced portfolio LNG players and end-users in Asia to urgently fill short positions, paying well in excess of $11.60/MMBtu, Reuters said in a report. One source at an Asian producer said that producers were offering August cargoes at $12/MMBtu.
Japan Korea Marker (JKM) prices for LNG hit $11.40/MMBtu last week, increasing by 95 cents on Thursday, the largest single-day price movement for the Asian benchmark since March 2011.
Unseasonably high prices
The price increases are exceptional since they come during spring months in the Northern Hemisphere when LNG demand is usually tepid. Demand for LNG and consequently its price increases during cold winter months in North Asia and drop considerably during milder spring months, and often pick back up to some degree again during hot summer months amid more air conditioning usage.
The concern now for LNG users and traders is that high mid-year prices could translate to even higher prices for the upcoming winter season.
North Asian buyers, Japan, China, and South Korea represent the three largest LNG buyers in the world, with that demand growth projected to increase even more as China buys more natural gas to offset record air pollution levels in its urban centers and per Beijing’s mandate that gas make up at least 10 percent of the country’s energy mix by 2020.. Further gas earmarks are set for 2030. China’s LNG imports for the first four months of 2018 were up almost 60 percent compared to the same period last year.
In December, China passed South Korea to become the world’s second largest importer of LNG. According to commodities data provider S&P Platts Global, China imported 5.05 million mt of LNG, up 38.25 percent year on year, registering its single highest ever monthly import volume since it started importing LNG in 2006.
China’s increased LNG procurement could also shorten the ongoing supply glut of the super cooled fuel that until around a year ago was projected to last until round 2022, even later. China’s gas demand is projected to triple to more than 400 bcm by 2040 from 210 bcm in 2016, the Paris-based International Energy Agency (IEA) said in November, a development that has already altered gas markets in Asia, and even globally. By Tim Daiss for Oilprice.com