Asian spot LNG prices poised to hit new high

Asian spot LNG prices are poised to surpass the all-time high recorded early this year, as firmer buying activity from within and outside the region shows little sign of abating.

Bangladesh's state-controlled Rupantarita Prakritik Gas (RPGCL) possibly paid late last week around $36-36.50/mn Btu to trading firm Gunvor for a 24-25 October delivery, which is the highest priced cargo transaction since mid-January last year.

New records are expected to be set in the coming weeks and months, as buying activity from within and outside Asia gathers pace to extend current price gains.

The front half-month ANEA price, the Argus assessment for spot LNG deliveries to northeast Asia, was assessed at $34.685/mn Btu for first-half November deliveries on 1 October, up by $15.80/mn Btu, or 84pc, from $18.885/mn Btu for first-half October deliveries on 1 September and nearly sevenfold the $5.080/mn Btu assessed exactly a year earlier. It is also $5.035/mn Btu shy of the current high at $39.720/mn Btu for first-half February deliveries on 13 January.

"Winter isn't even here yet and this is what's happening… wait till buyers start looking for January and February cargoes," a trader at a European trading firm said.

Argus is currently assessing prices for deliveries from first-half November to second-half December, in line with general buying interest. The northern hemisphere winter season typically runs from the end of October to the following March, with peak demand falling in January and February.

RPGCL's deal level was surpassed by Japanese utility Tohoku Electric's purchase of a 2 February delivery at $39.30-40/mn Btu from TotalEnergies on 13 January this year. An unseasonably cold winter and a spate of global supply disruptions pushed Asian spot LNG prices to unprecedented levels at the beginning of this year.

Asian LNG buyers, particularly from Japan, had sought to avoid a recurrence of last winter's scramble for cargoes and stave off a price rally this year by purchasing volumes much earlier in advance. Some even had to sell surplus cargoes resulting from milder than expected demand from the residential and industrial sectors in August.

Demand picks up

But demand from other regions has been particularly robust, with key buyers in China and Taiwan enquiring for, and acquiring, a large number of cargoes.

China's Unipec, the trading arm of state-controlled Sinopec, bought around 13 cargoes for deliveries across November to March next year in a tender that closed 24 September. It may still be seeking more supplies for November-January deliveries, market participants said. Fellow Chinese state-controlled buyer CNOOC has been enquiring for an unspecified number of cargoes to be delivered across winter as well.

Buying activity from China is expected to gather pace especially following the end of the week-long national day holidays on 7 October, with the government pushing state-controlled buyers to secure supplies for this winter after several of the country's regions experienced power cuts because of a supply crunch. China's commitment to adhere to the World Health Organisation's air quality standards during the Winter Olympics that will be held in Beijing across 4-20 February next year also means that the country will need more LNG as it cuts its coal consumption.

Taiwan's state-owned CPC is probably on the lookout for more winter supplies following its purchase of a total of at least 17 cargoes for October-February 2022 through two separate tenders that closed on 27 August and 23 September.

Gains in Asian spot LNG prices have also been driven by an unprecedented rally in European gas hub prices, with the severe winter last year having drained stocks in many European countries including Germany and the Netherlands and leaving inventories significantly lower than usual.

Gas storage inventories in Europe were 75.1pc full at 831TWh (79.4bn m³) on 1 October, lower than the 94.7pc and 1,057.1TWh recorded a year earlier and the average 89.6pc and 984.6TWh held by inventories in the same period over 2016-20.

Earlier expectations that the 55bn m³/yr Nord Stream 2 pipeline from Russia to Germany could quell supply shortages were dashed when German energy regulator Bnetza said it had until early May next year at the latest to decide on the project developer's application to act as the line's operator, before which the line cannot start up and start flows.

This, combined with firmer domestic demand in Russia limiting its gas flows to Europe, renewed concerns about the availability of gas supplies during the region's peak demand season.

The rise in carbon emissions allowance prices in past months also meant that coal-fired power plants have had to give way to gas-fired generation, leading to a significant call on gas for power generation.

The month-ahead Dutch TTF natural gas price surpassed the previous high of $11.632/mn Btu on 3 December 2013 at $11.691/mn Btu on 29 June this year. It has shown no sign of abating in subsequent months, rising by as much as $19.483/mn Btu, or 167pc, since then to a record high of $31.174/mn Btu on 1 October.

Pakistan and Bangladesh have also been prolific with their LNG purchases, issuing more tenders than usual to meet higher domestic power demand. Buyers from South America have also been seeking cargoes in the spot market. Argentina on 30 September issued a tender to buy four cargoes for deliveries over October-December, following Turkish state-owned Botas' tender that closed on 27 September to buy 20 cargoes to be delivered from October to February next year.

Weather to determine rally

How severe this winter turns out will be key in determining the length and extent of the continuing price rally. A colder than expected winter means several Asian buyers will have to secure additional supplies to meet extra heating requirements, increasing the competition for a limited pool of supplies.

The Japan Meteorological Agency's latest three-month forecast published on 24 September predicted a 40pc probability of below-normal temperatures from December to February across most of the country, leading to expectations that this winter will generally be a cold one for the country and its northeast Asian neighbours. Only Japan's Hokkaido and Tohoku regions are forecast to have a 30pc probability of colder than usual weather in the same period.

"I don't have additional spot requirements in the fourth quarter. But if it will be very cold, I have to buy [cargoes for delivery in the] middle of winter," a Japanese buyer said, referring to supplies for delivery in January and February.

Oil-linked reversal

Sharp gains in Asian spot LNG prices have now put them at a substantial premium to Brent crude oil-linked prices, a reversal from at least the last two years when they were at a discount to term prices.

Oil-linked term contract prices for November deliveries indexed at around 14.5pc to Brent based on a three-month crude average (301) contract at $10.540/mn Btu on 30 September, $22.025-22.180/mn Btu lower than the ANEA price for first-half November second-half November at $32.565/mn Btu and $32.720/mn Btu respectively on the same day. The slope of many historical Asia-Pacific long-term contracts was pegged at around 14.5pc to Brent. But there were several contracts negotiated and agreed at a lower slope of 10-11pc in the past two years on the back of low spot prices.

"Some buyers wanted more spot when prices were at all-time lows last year, but now they realise how volatile spot prices will be and want to rely on term again," a Japanese trader said.

This was echoed by an Indian trader, who expects that "there will be a rush to sign HH [Henry Hub]/Brent-linked deals" when spot prices ease. "The last two years we saw a huge swing towards spot sourcing. People here are already talking about long-term supplies once the price softens," he said.

The front half-month ANEA price slumped to a record low of $1.675/mn Btu on 30 April last year as the Covid-19 pandemic exacerbated already weak demand following a supply glut, with oil-linked term prices then at least five times higher than spot levels.

Price hike spurs fuel switching

The latest rally in spot LNG prices has pushed several Asian buyers to turn to cheaper alternative fuels to meet their power requirements.

At least two Japanese power utilities have boosted operating rates at their oil-fired power units to limit gas-fired power generation and slow the draw on LNG inventories.

A few buyers in India have also switched from gas as feedstock to heavy fuel oil or low-sulphur heavy stock, a residual fuel processed from crude, to avoid buying costly spot LNG, market participants said.

By Joey Chua