Column: Massive LNG spot prices in Asia are paid by few buyers

Liquefied natural gas (LNG) storage tanks and a membrane tanker are seen at Tokyo Electric Power Co.’s Futtsu thermal power plant in Futtsu, east of Tokyo, February 20, 2013. REUTERS / Issei Kato / File Photo

LAUNCESTON, Australia, October 7 (Reuters) – “Unprecedented” is a word oft-used too much to inject hyperbole into a market narrative, but the current rise in spot prices for liquefied natural gas (LNG) in Asia is definitely permissible .

According to the valuation used, LNG spot prices have increased by almost 900% in the last eight months.

Beyond the media headlines, however, it’s probably worth asking how relevant quoted spot prices are. In other words, how much super refrigerated fuel is actually trading at all-time highs?

Another question is how quickly demand will erode as LNG becomes too expensive for users to tolerate.

The spot price of LNG topped $ 50 per million British thermal units (mmBtu) on Wednesday, according to an assessment by commodity price information agency S&P Global Platts, while rivals Argus announced that their marker had exceeded $ 40 per mmBtu.

The Platts Japan Korea Marker (JKM) benchmark for November shipments jumped to $ 56.326 per mmBtu on Wednesday, up $ 16.655 from the previous day, the largest single-day increase since Platts reported started evaluations in 2009.

Price is up about 870% from its 2021 low of around $ 5.80 per mmBtu in late February.

Argus said its price for deliveries in the first half of November jumped to 42.095 mmBtu, up 15.6% from the previous day.

Asian spot LNG prices follow natural gas prices in Europe, where fears of insufficient storage to get through the coming Nordic winter have pushed regional benchmarks to record highs.

Asian prices have surged in recent weeks, easily surpassing previous highs of just over $ 30 per mmBtu, reached in January as demand increased during a colder-than-usual winter in North Asia.

There are fears that the coming winter will also be colder than average, which means demand for LNG and other fuels is expected to remain high.

It should be noted, however, that relatively few cargoes are actually traded at current record prices, and those that are have been purchased primarily by Chinese utilities.

About two-thirds of the LNG shipped to Asia is traded under long-term contracts, mostly tied to the price of crude oil.

While these forward cargoes are also affected by the rise in oil prices, the gain in crude is nowhere near the magnitude of the increase in spot LNG, meaning that forward LNG buyers are mostly isolated from soaring spot prices.

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Buyers who have taken shipments more occasionally in recent years, such as India and Pakistan, have reportedly largely pulled out of the market, as current prices make LNG unsustainable.

India tends to use natural gas in industrial processes such as the manufacture of fertilizers, and these users will do their utmost to switch to alternative fuels, or ultimately stop production.

Buyers who use LNG for power generation are likely to idle units rather than suffer the massive losses they will incur at current prices.

This can result in government intervention to keep generators running, but it can also result in as many fuel changes as possible or lead to blackouts in some countries.

Traders reported that a Japanese utility with excess cash freight could not find a buyer among its domestic peers. The cargo is believed to be a limited destination in Japan.

While it is likely that only a small number of cargoes will trade at the current spot price, it is still likely that prices will remain high in the months to come, given concerns about insufficient supply for the winter and the apparent inability of producers to ship more.

Monthly LNG exports to the world stood at 31.17 million tonnes, slightly below August 31.26 million, according to data from commodity consultants Kpler.

So far, exports for October are expected to be around 29.19 million tonnes, but that figure will likely increase as more cargoes are assessed.

However, the current volume of LNG shipped is well below the best month for 2021 – 34.59 million tonnes in January – indicating that supply is still insufficient.

The views expressed here are those of the author, columnist for Reuters.

Editing by Tom Hogue

Our standards: Thomson Reuters Trust Principles.

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