Asian LNG Rally Dependent on Winter Forecasts

The customary rally in Asian spot liquefied natural gas (LNG) prices for the northern winter has spluttered long before it normally does, amid market concern over plentiful supply and lacklustre buying.

The spot price <LNG-AS> dropped to $13 per million British thermal units (mmBtu) last week, down from the recent high of $15 reached in late September.

While the price is still 24 percent higher than the 3-1/2-year low of $10.50 per mmBtu reached at the end of July, it's considerably short of the previous winter peak of $20.50 reached in early February.

While market expectations were that spot prices would peak well below last winter's record high, the fading of momentum in recent weeks is somewhat surprising.

There are broader supply and demand issues at play in LNG, but the most likely explanation for the recent price moves comes from the short-term trading market.

It's likely that cargoes bought by traders during the seasonal summer price slump have been offloaded, as the realisation came that this winter was unlikely to see a significant rally.

Also, with prices dropping to multi-year lows in the summer, there would have been the temptation to buy increased volumes in the hope of making bigger profits during the winter rally.

The clearing of these trading cargoes may open up spot prices for a renewed rally, but the extent of any price gain is likely to be limited by supply and demand factors.

Demand growth for LNG among Asian buyers has been muted, and this is likely to remain the case for the winter, in the absence of a colder-than-forecast season.

The Japan Meteorological Agency is currently forecasting that most of the country will have a normal winter, with the southern third of the country having a 40 percent chance of higher-than-usual temperatures.

Such an outcome would mean no unusual spike in heating demand, and therefore less chance of spot cargoes being sought by the world's largest importer of the super-chilled fuel.

The possibility of the restart of two nuclear reactors in Japan may also limit the demand for LNG, although latest reports indicate that the Sendai plant is unlikely to start generating until early next year.

Currently all 48 of Japan's nuclear reactors remain offline, more than three years after an earthquake and tsunami destroyed the Fukushima Daiichi plant. The Sendai units are the first to pass the regulator's safety guidelines.

While Japan's LNG imports did rise a strong 10.5 percent year-on-year in September, this was an exception to recent trends, with the year-to-date gain in imports being only 2.7 percent.

DEMAND GROWTH MUTED, SUPPLY GROWTH ROBUST

South Korea, the second-ranked LNG buyer, saw a seventh consecutive month of weaker imports, with a 6.6 percent fall in year-on-year imports in September, taking the year-to-date decline to 7.4 percent.

Chinese imports fell 8.1 percent in September from a year earlier, although year-to-date gains are still a relatively strong 14.2 percent.

India also has a positive number for 2014, with consultants Energy Aspects estimating a gain of about 6 percent in the first nine months over the same period in 2013.

But the overall picture that emerges isn't one of strong demand growth, and the likelihood of a normal to mild winter in North Asia may keep it that way for the next few months.

On the supply side, the wave of new projects in Australia is starting to come onstream, with BG Group (BRGXF)'s $20.4 billion Queensland Curtis facility expected to ship its first cargo by the end of the year.

Six other LNG projects are currently being built in Australia, with three due to start production next year, while Exxon Mobil (XOM)'s project in Papua New Guinea started exporting this year.

This makes it likely that the Asian LNG market will turn from deficit to surplus over the medium term, especially when U.S. exports start from 2015 from the first of two projects currently under construction.

Increased competition from cheap coal and now cheaper oil is also likely to pressure LNG prices.

Overall, the likely pattern for Asian spot LNG prices is likely to be one of lower seasonal peaks and deeper troughs.
 

By Clyde Russell