LNG at $ 25 / MMBtu Sparks Fuel Switch, Stifles Asian Spot Market Activity


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LNG spot prices in Asia exceeding $ 25 / MMBtu prompted the region’s largest natural gas importers to scramble to cover exposure to energy prices for the winter, dampening spot market interest and accelerated the shift to alternative fuels.

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Japanese LNG importers have said the price level is “extreme” for this time of year and at least two town gas utilities have said the companies are not looking for spot LNG shipments due to weak domestic demand amid the coronavirus pandemic.

A source with a Japanese electricity utility said it had secured enough LNG shipments for the winter, but the price level was “a little scary” amid signs of tightening supplies of gasoline. Asia and Europe, and that buyers could switch to cheaper coal.

Several Japanese power companies – which typically need two months to adjust their LNG reception volumes to balance their needs – have already acted early to secure fuels for the winter, some fuel purchases. domestic taking place even during the summer.

The wild card will be the weather forecast for December-February, with an indication of normal winter weather so far. Japan tends to experience colder winters when affected by the La Nina weather phenomenon, but there is so far a low likelihood of that happening, according to preliminary outlook released on September 10 by the agency. Japanese meteorological.

Chinese importers said the Atlantic and Pacific basins were fighting over cargoes and the European gas market was extremely sensitive, but Asia was not very optimistic about demand.

“The strong support given to JKM was not enough to widen the gap the month before JKM-TTF, showing just how fragile the demand situation is in Asia amid reports of the closure of the JKM-TTF. ‘end-user installations, “Jeff Moore, director, Asian LNG Analytics at S&P Global Platts said.

He said price-sensitive supplies are likely to start shifting to Europe, which could temper price increases once volumes emerge.

“That said, it is unlikely that the Atlantic to Pacific arb could collapse or turn negative for any significant period of time, given the relatively short positions of portfolio players in Asia as well as the emergence of ‘inelastic heating demand as we move into winter,’ added Moore.

“The TTF goes up and up, any time the downside seems temporary,” said a Singapore-based trader, adding that the European market is basically right and people are putting more risk premium in winter now, and are concerned that the Asia withdraws cargo.

China and South Korea moderate demand

In China, truck-based LNG prices, which mirror the LNG spot market, remained broadly unchanged at around 6,000 yuan / mt during the week of September 16, ignoring the JKM surge, with traders claiming that the Weak domestic demand cannot support further price hikes and LNG truck sales have fallen 10-20% this month.

China’s LNG demand declined after truck-based LNG prices exceeded 5,000 yuan per tonne in late July, leading to increased inventories at many LNG receiving terminals, according to domestic trade sources. 6,000 yuan / mt is the highest price that many industrial users can afford, and the import cost of LNG shipments delivered in cash in October has risen to nearly 8,500 yuan / mt on the basis of valued at $ 25 / MMBtu.

Chinese LNG importers have mostly been left on the sidelines as they are well supplied for the fall and winter. A Beijing-based market player turned down state importer CNOOC’s offer for a cargo of LNG to be delivered in November, saying: “I doubt anyone is buying cash cargoes at such an insane price.” .

Chinese national oil companies like Unipec and CNOOC have been seen selling cargoes for cash, for delivery in November, but at the same time, there are fears that if prices rise deeper in the winter, industries could shut down, as the government will give the priority to residential heating.

Meanwhile, in South Korea, the country’s largest LNG importer, Kogas, has increased its cheaper oil-linked futures levy to replace high-priced spot volumes.

Kogas has not been affected by the surge in spot prices as 70% of its purchases are based on futures, and it currently holds enough inventory as it has increased its LNG imports in recent months, said a responsible. Kogas’ LNG imports increased 11.6 percent year-on-year to 19.331 million tonnes in the first half of this year, from 17.314 million tonnes in the same period last year, according to official data.

The official expects spot prices to fall “as supply increases sooner or later,” and said the company could cut LNG imports if prices continue to rise and weaken demand.

South Korea’s Ministry of Trade, Industry and Energy has said it will increase domestic prices for natural gas, saying town gas prices have been frozen for a year and a half despite costs of higher import.

An official at a Korean private electricity supplier and town gas supplier said local LNG importers other than Kogas had reduced LNG imports by around 5-6% so far this year due to rising prices and may reduce their additional purchases if prices continue to rise.

Price pressure in South Asia

In India, high prices have put pressure on gas consumers in the electricity, fertilizer and town gas sectors and may force industrial natural gas companies to raise their domestic prices. Western Indian gas distributor Gujarat Gas raised prices 12% a month ago, analysts said.

Pakistan, whose dwindling gas reserves have increased its dependence on LNG imports, is struggling to secure multiple LNG tenders due to high spot prices.

Pakistan can mitigate the impact of high LNG spot prices by diverting LNG from the power sector, priced at around 13.37% of Brent to the domestic and industrial sectors, said Fahad Rauf, director of the research at Ismail Iqbal Securities, a brokerage house based in Karachi. This will allow the electricity sector to burn cheaper coal, although it adds to pollution during the winter. “Nonetheless, the growing dependence on oil-based electricity generation during winters is the only way forward in the short term,” Rauf said.

Atif Zafar, economist and research director at Topline Securities, said high domestic energy prices have driven up costs for industries and government, as gas circular debt on the LNG subsidy has reached 750 billion Pakistani rupees ($ 4.5 billion).

Dependence on fuel oil for power generation could increase by 12% to 3.3 million tonnes in fiscal year 2021-22 (July-June), said Abdur Rafay, research analyst at Pearl Securities.

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