Harsh winter in key markets drives spot LNG prices in Asia to record levels

Spot LNG in Asia is highly sensitive to marginal demand in Japan, Korea and China, where heating load has gone up significantly. Emergency buying by Japanese power firms is driving prices up

LNG — The multi-fold price explosion is the result of a potent cocktail of pent-up gas demand, that had plummeted during the pandemic, and lack of adequate transport

Twesh Mishra New Delhi

5 min read Last Updated : Jan 19 2021 | 12:30 AM IST

Spot Liquefied Natural Gas (LNG) prices in Asian markets are at record high levels for deliveries due in February 2021. These prices are driven by a harsh winter in North East Asia pushing up demand for spot LNG in Japan, South Korea, and China.

“The spot LNG price in Asia is highly sensitive to marginal demand in Japan, Korea and China. Since these places are experiencing harsh winter, the heating load has gone up significantly. Emergency (unplanned) buying by Japanese power companies is the driving factor for pushing up prices,” Debasish Mishra, Partner at Deloitte told Business Standard.

Natural gas price in the spot market (headed for North East Asian countries) is broadly represented by the LNG Japan/Korea Marker (JKM). Prices for deliveries due in February zoomed to over $ 32 per million British thermal units (mBtu) last week. These never-seen-before record high levels were following a firming up of prices from December 2020 that had risen to above $ 12 per mBtu.

“Since May, when the JKM Asian spot LNG price bottomed out below $2 per mBtu due to oversupply, the market has enjoyed a remarkable rally, the JKM increasing more than 16-fold to a record high of $32.50 per mBtu in January,” a report by S&P Global Platts said.

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The multi-fold price explosion is the result of a potent cocktail of pent-up gas demand, that had plummeted during the pandemic, and lack of adequate transport.

“This (the price hike) was driven first by an unprecedented supply-side response to low prices, with US LNG cancellations starting to rebalance the market through the summer, followed by strong winter buying demand from Asian buyers in the fall and a number of supply-side issues. Since the start of 2021, cargo shortages, transportation bottlenecks, record shipping rates, and plunging winter temperatures have lent further support to the market,” the report added.

The surge in demand was such that LNG sellers to Pakistan LNG Limited (a public sector company in Pakistan) refused to supply contracted quantities due in February 2021. These contracts were awarded in December 2020, but two weeks into January 2021, the gas suppliers expressed inability to meet the terms of delivering in February.

According to a note from the Institute for Energy Economics and Financial Analysis (IEEFA), emerging markets such as Vietnam, Pakistan and Bangladesh, amongst others, that are looking at LNG to provide a source of power, will be faced with more volatile and also higher prices.

IEEFA says that Vietnam, Pakistan and Bangladesh have over $ 50 billion of proposed gas-fired power projects at risk of cancellation from unaffordable LNG prices.

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It is estimated that 11 to 12 per cent of the total natural gas consumed globally is through short term LNG trade mostly focused on North East Asia. European gas demand is largely met from piped gas supplies while most Indian consumers usually source through long term natural gas trade contracts.

This situation in India had changed during the pandemic lockdown because spot LNG prices had crashed. Refineries and gas-based power plants saw it as an opportunity and lapped up imported LNG during the pandemic months. This has ceased now with the price of natural gas headed for India also being hiked in tandem with the JKM prices. Spot prices on the West India Marker (WIM), a benchmark for spot LNG prices delivered to India, had hit an all-time high at nearly $ 18 per mBtu on January 8 for deliveries due in February 2021.

The prices hikes are also an opportunity for GAIL (India) to trade. The public sector undertaking has 20-year LNG contracts to buy 5.8 million tonnes per year of U.S. LNG, split between Dominion Energy Inc's Cove Point plant and Cheniere Energy Inc's Sabine Pass facility in Louisiana.

Unlike most other LNG deals that India has, that have prices that are liked to crude oil, this deal is liked to Henry Hub prices (US LNG). Natural gas is being traded on the Henry Hub at less that $ 3 per mbtu, as per data compiled by the US Energy Information Administration.

“GAIL usually does multiple swap deals with the gas it gets from these contracts. Since there is a significant price difference between Asian and US LNG prices, GAIL has an opportunity to trade and get good margins,” a sector watcher said.

But this opportunity may not remain for long. It is expected that the JKM prices will be calmer by mid-February as more US LNG reaches Asian shores, shipping supply lines are optimised, and the winter season sets to usher a warmer spring.

LNG markets in Asia have been on a roller coaster