A wide first quarter-fourth quarter spread in 2022 northeast Asian delivered LNG prices in recent months, against a comparatively flat oil-linked price curve, has offered a strong incentive for long-term LNG buyers to bring forward supply from the start of next winter to the start of 2022.
Oil-linked LNG prices for delivery next year are higher in the first half of 2022 than later in the year, with small differences between contracts with three-month and six-month price formation periods (see oil-linked prices graph). A backwardation structure in the oil-linked curve — with prompt prices at a premium to forward values — has historically provided an incentive to defer deliveries until later in the year, boosting receipts at times when contractual prices are lower.
But the rally through late 2021 by spot LNG prices, which are at an ample premium to oil-linked prices for the whole of 2022 at present, increases the risk of firms having to pay a sizeable premium for additional spot LNG compared with their long-term supply. As a result, delivery schedules for next year may be defined more by the spot-term spread than the shape of the oil-linked curve.
Firms holding long-term oil-linked LNG supply next year may have a significant incentive to not only bring forward supply from the summer — when demand is often weaker, as tends to be reflected in spot prices — but also from the first three months of winter, given that first-quarter spot LNG prices have held a much wider premium to oil-linked prices than for the fourth quarter of 2022 (see 1Q-4Q ANEA prices graph).
The Argus Northeast Asia (ANEA) first-quarter 2022 des price expired at a $27.55/mn Btu premium to the corresponding three-month average 13pc oil-linked price on 15 December as the ANEA January contract expired, with ANEA February-March prices continuing to hold ample premiums in subsequent days. The premium for spot LNG prices over corresponding oil-linked prices further along the curve was considerably less — $14.42/mn Btu for the second quarter, and $14.64/mn Btu and $15.77/mn Btu for the third and fourth quarters, respectively (see ANEA versus 301 prices graph).
There has also been limited incentive for buyers to lift their fourth-quarter 2022 term receipts above summer deliveries, given the slimmer difference between spot-term price spreads for the fourth quarter and the summer quarters.
Term contracts generally include some volume flexibility, typically equivalent to around 10pc of the annual contractual quantity. Firms exercising this flexibility to maximise deliveries in the first quarter of the year may weigh on spot activity in Asia, where utilities have already been heard to have secured more supply on a forward basis than in recent years, unless particularly cold weather significantly boosts heating demand across the region.
Similarly, producers facing stronger supply obligations under term contracts may have limited spare capacity to produce additional cargoes for the spot market, reducing overall spot activity.
But stronger contractual receipts over the first quarter of 2022 would leave buyers more reliant on spot supplies over the remainder of the year, and producers with more spot cargoes to offer. This could widen the scope for the price volatility witnessed in recent months persisting into next year, particularly in the event of strong European injection demand during the summer.
Supplies to Europe have been insufficient to pare quick withdrawals so far this winter, increasing scope for Europe to end the winter with relatively low levels of gas in storage. Total European underground inventories totalled 622TWh on 28 December, 231TWh less than a year earlier and 254TWh below the corresponding three-year average. The stocks deficit compared with previous years has widened since withdrawals began in late October, with aggregate inventories 207TWh down from a year earlier and 176TWh below the three-year average on 1 November.
A rise in spot activity from the second quarter onwards could be most noticeable in the Pacific basin, where buyers hold considerably more long-term oil-linked supply than buyers in the Atlantic basin. In contrast, more long-term contracts in the Atlantic basin are for fob volumes — particularly from the US — indexed against US domestic gas prices. As a result, long-term Atlantic buyers can still market their volumes to downstream buyers on a spot des basis, reducing the overall impact of the disparity in spot LNG price premiums through 2022 on the amount of spot trade in the basin.
