Column: Buyer's mistakes likely to blame for LNG price surge, not only winter weather

LAUNCESTON, Australia (Reuters) - The surge to record highs for the price of spot liquefied natural gas (LNG) is being largely attributed to severe cold weather over much of northern Asia, but miscalculations by buyers of the fuel are probably a larger factor.

FILE PHOTO: Employees work next to tanks for liquefied natural gas (LNG) at a factory in Xian, Shaanxi province, China June 3, 2019. REUTERS/Stringer

The weekly spot price assessment settled at $21.45 per million British thermal units (mmBtu) on Jan. 8, eclipsing the prior record of $20.50 from February 2014. Prices have rallied an astonishing 1,060% since they hit an all-time low of $1.85 in May.

There are also media reports of at least one transaction in the past week with a price of around $33 to $35 per mmBtu, which shows just how desperate some buyers are to secure supplies of the super-chilled fuel.

While there is no doubt the winter has been more severe than usual in northern Asia, with massive snowfalls in Japan and temperatures falling to the lowest since 1966 in Beijing, the weather alone can’t explain such a huge price spike.

In late November, when the spot price was just $6.40 per mmBtu, the message from importers in the top three buyers, Japan, China and South Korea, was that they were comfortable with the LNG volumes they had secured for the upcoming winter.

The view was also expressed that even if the winter did turn out to be colder than expected, there was plenty of spot cargoes available, given the ongoing surplus of LNG production capacity.

That comfort among buyers proved to be entirely misplaced, and the spot price started to surge from the week of Nov. 20 onwards as buyers were forced to re-assess the level of anticipated demand, natural gas inventories and the availability of spot cargoes.

Certainly some production outages in major exporter Australia and elsewhere did serve to tighten the supply of spot cargoes, but this shouldn’t have been enough to provoke such an unprecedented rally.

The LNG flows assessed by Refinitiv showed that delivered volumes did rise in December, but not dramatically so compared to the same month in prior years.

A total of 20.1 million tonnes of LNG was discharged at ports in Japan, China and South Korea in December, according to Refinitiv vessel-tracking data.

This was up 9.6% on the 18.34 million tonnes in December 2019, and an increase of 5.7% on December 2018.

China was behind much of the rise in volumes, importing 8.14 million tonnes in December, up 14% on the 7.14 million in December 2019 and a jump of 27% from the 6.42 million tonnes of December 2018.

Japan, whose status as the world’s top LNG buyer is being increasingly challenged by China, imported 7.73 million tonnes in December, up 16.6% from 6.63 million in December 2019, but steady from 7.72 million tonnes in December 2018.


On the supply side, there are indications that the tightness that has driven the recent rally is starting to ease, with the United States, the main swing supplier to the market, shipping more cargoes in recent weeks.

U.S. LNG exports rose to 6.18 million tonnes in December, the highest monthly total assessed by Refinitiv, and up from 5.77 million in November.

Given the sailing time of up to six weeks from the U.S. Gulf coast to north Asia, much of the export volumes from late November and December will only arrive in the current month, and may spill over into early February.

Exports from Australia have also increased in recent months, although December’s 6.51 million tonnes was below the 6.89 million in November and the 6.77 million in October.

However, these three months represent a recovery from volumes around the middle of the year, with both June and July coming in at under 6 million tonnes.

Qatar, which lost its crown as the world’s top exporter to Australia, also saw reasonably strong exports in December, with shipments of 6.48 million tonnes, up from November’s 5.86 million and 6.42 million in October.

The volumes of LNG being shipped in recent weeks doesn’t really square with the massive surge in prices, as it appears there is plenty of LNG being produced, shipped and delivered.

What is more likely is that some buyers misjudged the availability of spot cargoes, and when hit with a surge in demand found themselves unable to secure further supply, thus bidding up the prices massively for the few cargoes still available.

If this is the case, then prices could reverse as soon as the current period of strong demand starts to ease.

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

Editing by Christian Schmollinger