LAUNCESTON, Australia (Reuters) – “Unprecedented” is a word often over used to inject some hyperbole into a market narrative, but the current rally in spot Asian liquefied natural gas (LNG) prices definitely qualifies.
Depending on the assessment used, spot LNG prices have surged by as much as nearly 900% in the past eight months.
Beyond the media headlines, however, it’s probably useful to ask just how relevant are the spot prices being quoted. In other words, just how much of the super-chilled fuel is actually being traded at the record highs?
Another question is how fast will demand erode as LNG becomes too expensive for users to tolerate.
The spot price of LNG surged above $50 per million British thermal units (mmBtu) on Wednesday, according to an assessment by commodity price reporting agency S&P Global Platts, while rivals Argus reported their marker jumped above $40 per mmBtu.
The Platts benchmark Japan Korea Marker (JKM) for November deliveries surged to $56.326 per mmBtu on Wednesday, up $16.655 from the prior day, the largest single-day increase since Platts started assessments in 2009.
The price has risen by around 870% since its 2021 low of around $5.80 per mmBtu in late February.
Argus said its price for first-half November deliveries jumped to $42.095 mmBtu, up 15.6% from the day before.
Prices in Asia for spot LNG are tracking natural gas prices in Europe, where fears of insufficient storage to get through the upcoming northern winter have driven regional benchmarks to record highs.
Asian prices have leapt in recent weeks, easily surpassing previous record highs of just over $30 per mmBtu, reached in January as demand spiked during a colder-than-usual winter in north Asia.
There are fears the upcoming winter will also be colder-than-average, meaning demand for LNG and other fuels is likely to remain elevated.
It’s worth noting, though, that relatively very few cargoes are actually being traded at the current record high prices, and those that are have been bought mainly by Chinese utilities.
About two-thirds of LNG shipped to Asia is traded under long-term contracts, mostly linked to the price of crude oil.
While these term cargoes will also be hit by rising oil prices, the gain in crude has been nowhere near the magnitude of the increase in spot LNG, meaning term LNG buyers are mostly insulated from the surge in spot prices.
SPOT VOLUMES TO SLUMP?
Buyers that have taken cargoes more on a spot basis in recent years, such as India and Pakistan, are said by traders to have largely withdrawn from the market as the current prices render LNG unviable.
India tends to use natural gas in industrial processes such as making fertilisers, and such users will be doing their utmost to switch to alternative fuels, or ultimately shut production.
Buyers who use LNG for power generation will most likely idle units rather than run at the massive losses they will incur at current prices.
This may bring government intervention to keep generators operating, but it may also result in as much fuel-switching as possible, or lead to electricity blackouts in some countries.
There have been reports from traders that a Japanese utility with a surplus spot cargo has been unable to find a buyer among its domestic peers. The cargo is said to be destination restricted to Japan.
Even though it’s likely that only small numbers of cargoes are trading at the current spot price, it’s still likely that prices will remain elevated in coming months, given the concerns about inadequate supplies for winter and the seeming inability of producers to ship more.
Monthly exports of LNG worldwide were 31.17 million tonnes, slightly below August’s 31.26 million, according to data from commodity consultants Kpler.
Exports for October so far are expected around 29.19 million tonnes, but this figure will likely rise as more cargoes are assessed.
However, the current volume of LNG being shipped is well below the best month for 2021 – January’s 34.59 million tonnes – indicating supply is still short of potential.
The opinions expressed here are those of the author, a columnist for Reuters.