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Column: Surge in spot Asian LNG prices looks good on paper, but deceives

LAUNCESTON, Australia (Reuters) - The spot price of liquefied natural gas for delivery to north Asia has more than doubled since hitting an all-time low earlier this year, but the gain is more impressive on paper than in reality.

A liquefied natural gas (LNG) tanker is tugged towards a thermal power station in Futtsu, east of Tokyo, Japan November 13, 2017. REUTERS/Issei Kato

The spot price ended last week at $4.10 per million British thermal units (mmBtu), its highest since mid-January and 122% above the record low of $1.85 touched in separate weeks at the beginning and end of May.

While traders playing the spot market could in theory have booked major profits from such a strong percentage increase, the reality for LNG producers selling into Asia is somewhat different.

Spot LNG prices in Asia tend to be cyclical, with the high point for the year coming in the peak of northern winter demand, and generally a smaller peak occurring during the summer demand period.

The economic fallout from the novel coronavirus pandemic, coupled with a surge in supply, has upended the usual cyclical behaviour of spot prices, with a clear downtrend from the pre-winter peak of $6.80 per mmBtu in October last year to the lows in May.

The recovery in spot prices may not be driven mainly by improving demand, rather it may be linked to rising prices of natural gas in the United States and Europe due to a hotter than usual summer boosting air-conditioning demand for electricity.

U.S. natural gas futures have gained 65.2% between the closing low for the year so far of $1.482 per mmBtu on June 25 to the $2.448 finish on Aug. 21.

Similarly, UK natural gas futures have leapt 168% from their year-to-date low of $1.027 per mmBtu to the close of $2.755 on Aug. 21.

The increase in these two benchmarks is likely a catalyst for spot Asian LNG’s recent gains, as well as some signs that supply had been tightening, with a maintenance shutdown scheduled for Chevron’s Gorgon project in Western Australia and cancellations of U.S. cargoes.

However, the supply issues may not have much impact, with Gorgon now undergoing a phased shutdown, and more U.S. cargoes expected in coming months.

Buyers of U.S. LNG are expected to cancel 10 cargoes for October, the lowest number for at least four months, according to trade sources citied by Reuters.

There is some evidence of improving LNG demand in north Asia, a region that includes Japan, China and South Korea, the world’s three biggest buyers of the super-chilled fuel.

LNG imports by countries in north Asia are on track to be around 16.6 million tonnes, according to Refinitiv data, which would be the strongest month since February.


However, it’s worth noting that the current spot price for Asian LNG is barely enough to incentivise more cargoes to be offered in the market.

Most U.S. projects require a price of $5-$6 per mmBtu to make shipping to Asia profitable, while Australia’s east coast ventures based on coal-seam gas are believed to need a spot price of at least $3.50 to make money, although the west coast projects need a far lower number of closer to $2.

This means that even the recent sharp rise in the spot price isn’t enough to make U.S. exports to Asia viable on a spot basis, while Australian producers are only just in the money.

A further concern for producers selling into Asia on longer- term, oil-linked contracts is that the lag typically built into these deals means that they are likely receiving less money for cargoes being delivered this month and next.

The price of benchmark Brent crude futures dropped to a 22-year low of $15.98 a barrel on April 22, at the peak of the brief price war between top exporters Saudi Arabia and Russia.

While the price war ended with an agreement by the group known as OPEC+ to deepen and extend crude production cuts, the crude-linked LNG that would have been arranged when the oil price was weak is likely being delivered in the third quarter.

While the recovery in Brent to trade in a range around $44 a barrel will once again boost oil-linked LNG prices, this will likely only be a factor in the fourth quarter.

This means that for the current quarter many LNG producers will be having to deal with weak oil-linked contract prices, as well as spot prices that are still soft in historical terms.

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

Editing by Richard Pullin