LAUNCESTON, Australia (Reuters) - The surge to record highs for spot liquefied natural gas (LNG) in Asia may be fading, but the implications of the price spike are likely to be longer lasting.
The weekly assessment for cargoes for March delivery to north Asia was $8.90 per million British thermal units (mmBtu) in the week ended Jan. 22, at the lower end of the range of $8 to $14 estimated in the prior week.
Cargoes for February delivery were last at $29 per mmBtu in the week to Jan. 15, before the assessments rolled over into March.
Earlier, spot LNG rose to a record high of $32.50 per mmBtu, according to price agency S&P Global Platts, which publishes the Japan-Korea-Marker used as a reference point for spot deals in the region.
The surge in pricing was all the more remarkable given that spot LNG in Asia was one of the major commodities hardest hit by the slump in demand during the height of lockdowns to combat the coronavirus pandemic, with the price reaching an all-time low of $1.83 per mmBtu in May last year.
The 1,675% jump in the spot price has thrown some assumptions about the LNG market under the bus, and prompted a re-think on how LNG may be developed, priced and traded in coming years.
There are a few factors worth noting about the massive increase in the spot price, and the equally rapid retreat once the crunch point of January-arriving cargoes was past.
The first is that while the price did surge to a record high, the actual volume of cargoes traded at such elevated levels was likely quite small.
Only the most desperate buyers were prepared to fork out prices above $30 per mmBtu for cargoes. These were most likely those with contractual obligations to supply the fuel that would otherwise have been lumped with costly defaults.
Other spot buyers, even those who wanted more LNG, sat out the spike and waited for prices to ease.
However, the massive price surge did show that while the overall LNG market may still be in a supply surplus, a demand surge, in this case caused by colder-than-expected weather in north Asia, can still overwhelm available supply.
But while the brief price spike may lead LNG buyers to reconsider inventory levels and spot cargo availability ahead of peak demand periods, the more lasting impact is likely to be around changes in pricing.
SPOT TO LOSE POPULARITY?
For several years the LNG market in Asia has been moving toward increased spot and short-term pricing, and away from the traditional model of long-term, crude oil-linked contracts.
Capacity additions in countries such as Australia and the United States, have boosted the availability of LNG and turned the market into one viewed as favourable to buyers.
Oil-linked contracts were also seen as more expensive and tied LNG to the price of fuel that isn’t really a direct substitute, and often trades on different dynamics to natural gas markets around the globe.
In some ways the idea of moving away from crude-linked contracts was valid in the early stages of the pandemic, as spot LNG prices collapsed by a greater margin than oil-linked prices declined.
But by the end of the year, when utilities in the three biggest LNG buyers in the world, Japan, China and South Korea, started to buy up increasing volumes, spot prices lost their attractiveness.
The question is whether utilities, such as Japan’s JERA, continue with their long-term vision of moving more toward a spot and short-term market, or whether the old security blanket of oil-linked, but guaranteed, supplies regains some popularity.
It’s likely LNG buyers don’t want a repeat of the recent extreme volatility, but perhaps they also don’t want to return to the restrictive crude-linked contracts that largely favoured producers by guaranteeing volumes at relatively high prices.
The compromise may be the increasing popularity of short-term, flexible contracts, which can vary from a few months to a few years and be priced against different benchmarks.
A six-month supply deal between a Japanese utility and a U.S. Gulf producer, benchmarked against Henry Hub natural gas futures may well suit both parties.
Similarly, a 12-month deal to supply India from Qatar on prices linked to a basket of Middle East crudes may also find favour.
The key is to generate flexibility without the volatility of spot pricing or the high costs of long-term contracts.
The spot and short-term market is about one-third of the total LNG traded in Asia, and this is likely to continue to grow, but short-term deals may prove more popular than playing in the prompt market.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Jacqueline Wong
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