LNG price boom set for fall as warmer weather looms in Asia

SINGAPORE: The breathtaking rally in liquefied natural gas (LNG) is likely set for a fall in coming weeks as a cold spell in Asia gives way to milder weather and lower heating demand, traders and analysts said.

Spot LNG prices have jumped by nearly 200% in the last month as freezing temperatures across North Asia boosted demand and depleted inventories. Over the last six months, they have soared by a dizzying 1,000%.

"Once temperatures rise and more LNG supply returns to the market, the rally should ease," said Chong Zhi Xin, director of Southeast Asia gas and LNG at IHS Markit.

The return of cargoes from Shell's Prelude floating facility in Australia after being offline for nearly a year will also help boost supply, Chong noted. "US LNG cargoes that are produced today can also reach Asia in 38 days, even if they travel via the Cape of Good Hope, so prices should definitely ease by mid-February."

S&P Global Platts' Japan-Korea-Marker (JKM), a reference for spot cargoes in Asia (for February delivery), rose to $32.494 per million British thermal units (mmBtu) on Tuesday, hitting a fresh record and up from just above $11 in mid-December.

But with temperatures expected to rise above average levels in Tokyo, Seoul and Shanghai over the next few weeks, prices for spot cargoes delivered into North Asia in March will be lower, traders said.

Australia Pacific LNG (APLNG), for instance, on Tuesday sold a cargo for loading in late February at about $15 per mmBtu, two traders said.

There are signs buyers from China are holding off from buying at current record highs and instead opting for deliveries at later dates such as in March, several traders said.

"We cannot afford such price levels... we are different from Japanese and Koreans since we have pipeline gas supply and domestic gas," a Beijing-based trader said, adding at least one cargo meant for China had been diverted to Japan.

Another Beijing-based trader added that buyers in China are reluctant to pay anything above $15 per mmBtu.

Indian buyers, who are typically more price sensitive, are also cutting back on imports, with some power plants in Gujarat running on alternative fuels, sources told Reuters.

"Regasification terminals' utilisation will remain low if international prices remain high," one of them said.

A big driver behind the jump in LNG spot prices has been power demand in Japan, where gas inventories are at such critical levels that utilities are snapping up any cargoes they can find, traders said, along with demand from South Korea.

In western Japan, power capacity utilisation recently topped 95% as temperatures plunged, IHS Markit's Chong said.

The eye-popping prices powered a 10% jump in total exports from top LNG producers Qatar, Australia, Malaysia, Russia and the United States jump in December versus November, data from Refinitiv Eikon showed, and traders expect shipments to climb further through March.

"Market prices are already far beyond their sustainable limit for a large number of countries where gas is used in the power sector, or even industrial sector where alternative forms of furnace fuels are available," said Robert Sims, research director at Wood Mackenzie.

"We expect substantial fuel switching to occur already at current prices if they do not correct within the next month."