Asia’s spot LNG prices have been stuck in a range since mid-June as buyers and sellers are unsure of the price direction for the rest of summer even as regional demand remains supported for the rest of 2021.
The day-to-day price volatility in Europe and Asia has made it difficult to optimize between the Atlantic and Pacific basins, and with US cargoes stuck in the Atlantic, an arbitrage window has to open for Asian end-users to pull in more volumes, traders said.The S&P Global Platts JKM, the benchmark price for spot LNG for Northeast Asia, was assessed at $13.288/MMBtu on July 13 for August delivery cargoes. It traded as high as $14.31/MMBtu a week earlier, one of the highest summer LNG spot prices in several years.
”Platts Analytics expects to see continued demand growth in Asia, which will mean the region will need to draw on volumes from the Middle East and Atlantic Basin through the end of the year,” Jeff Moore, S&P Global Platts’ manager for Asian LNG Analytics, said.
”The recent price support for JKM is also a factor of a stronger European gas market, and it’s likely the market will remain supported as long as storage inventories stay below normal and carbon prices stay elevated,” Moore added.
Although a large amount of procurement has already taken place for the summer, it was largely done through strip tenders, which were won by portfolio players who must optimize their positions, and given the net-short nature in Asia, there could be continued price support, he added.
Price uncertaintyChinese downstream margins have been negative since the last three to four weeks as the buying appetite of northeast Asia’s end-users has been lackluster, leaving many importers hesitant to procure spot cargoes.
”We are not in the market now; once JKM went above $11/MMBtu, we stopped seeking cargoes,” a market participant in South Korea said.
State-owned gas importer Sinopec sold multiple July-August delivery cargoes, and other companies including large private gas distributor ENN were also heard offering cargoes for the third quarter, in a bid to reduce losses incurred downstream, according to multiple trading sources.
”[There’s a] lack of agreement on current price level between buyers and sellers,” a second South Korean buyer said.
Spot buying activity from India has resumed at a slow pace. Since mid-June, six buy tenders have been issued by Petronet LNG, Indian Oil Corp, and GAIL for 11 cargoes, although many have not been awarded due to price volatility.
”US production issues [in the past couple of weeks] will affect the prompter August deliveries from the US,” a major Chinese importer noted. In June, US LNG exports fell by around 2 Bcf/day, which is lower than normal, or around one less cargo produced every one and a half days, due to outages.
JKM projections on the riseFor the rest of this year, several indicators could determine LNG’s price trajectory.
The primary risk to US LNG exports is not global gas fundamentals, which are expected to remain supportive for the remainder of the summer, but from the US Gulf Coast hurricanes, BofA Global Research said in a July 9 note to clients.
”Hurricanes can wreak havoc on LNG exports, which saw over 120 Bcf of shut-ins last year,” the BofA note said.
”While the probability of a repeat event remains low, US LNG exports have doubled from last year magnifying any potential disruptions or delays from hurricanes this year. On the flip side, any need this winter to shed LNG exports will require Henry Hub prices to compete with the global market.”
Citigroup Research told clients on July 8 that prices in the second half of 2021 should remain elevated, but with limited upside, expecting JKM to average $13/MMBtu in the third quarter and $13.90/MMBtu in the fourth, pushing up the annual average to $11.40/MMBtu.
The tight Asian market should stabilize once China’s power shortage eases, helped by stronger hydro generation; the return of nuclear in Japan, such as Kansai Electric restarting its Mihama 3 nuclear reactor in late June, and Asia’s summer weather temperatures getting closer to normal, Citigroup said.
”A potential warmer start to winter would also constrain prices as demand might be more muted in the beginning,” Citigroup said.
In an end-June note to clients, Morgan Stanley said: “Strong global demand coupled with outages has tightened the 2021 outlook. We continue to believe the global LNG market has entered a multiyear upcycle.”
The bank raised its JKM forecast to $10.25/MMBtu in 2021, from $8.75/MMBtu, anchored on the current cost of firm contracts for new supply and gas-to-coal switching thresholds in Europe.
It added that sustained demand growth and lingering supply outages had accelerated the market re-balancing into 2021, sooner than initially expected.