Weakening global LNG prices may cut US flows to Asia, boost floating storage

Fears of a supply glut in the global LNG market due to tepid European demand, ample inventories in Northeast Asia and deferment of procurement activity by South Asian buyers could lead international spot LNG prices to weaken further in 2023, cutting US flows to Asia and incentivizing floating storage, industry sources said.

Asian spot LNG prices had plunged over 60% year on year as of June 7 weighed down by healthy inventories in Northeast Asia after the peak winter procurement season.

Platts, part of S&P Global, assessed the July JKM price at $8.399/MMBtu on June 7, the lowest in over two years. Platts JKM for July stood at $9.077/MMBtu on June 6 on signs of emerging demand.

We estimate that global LNG prices would need to fall significantly through the balance of the year to cause US LNG exporters to cancel cargo loadings, Ross Wyeno, lead analyst for LNG Americas at S&P Global Commodity Insights said.

"Further coal to gas switching will likely be incentivized by falling LNG prices this summer," Wyeno said.

Platts assessed the Northwest Europe price for July at $7.397/MMbtu, lower than JKM for July on June 6, resulting in a $1.68/MMbtu difference between the two prices. That means it is more profitable for exporters on the US Gulf Coast to ship cargoes to Asia than Europe even after considering a freight differential of around 91 cents/MMBtu between the two continents, and assuming a tolling fees of $3/MMBtu and 115% of Henry Hub prices.

An absence of the El Nino weather phenomenon that typically brings warmer weather to Asia has also affected LNG demand in the region.

In May, inflows into Japan, the world's biggest LNG importer in 2022, fell 19.4% on the month and 24.6% on the year to 4.07 million mt, according to S&P Global data, because of lower power demand in the wake of mild temperatures for most of 2023 so far.

S&P Global ran a scenario with 3 C higher-than-normal temperatures across the third quarter of 2023 for Japan to test how the country's LNG demand could change.

"By utilizing a regression, the results showed that average power demand should increase by 2.5 aGW, or about 2.2%, above the base case of 114 aGW. For the third quarter of 2023, in the event of a heat wave, it is likely that both coal- and gas-fired power generation will respond to meet the higher demand," Andre Lambine, senior power analyst at S&P Global said, adding that Japan could need two-three extra LNG cargoes each month if temperatures rise.

Meanwhile, South Korean importers were bringing their US cargoes from term contracts to the Japan-Korea-Taiwan-China hub rather than shipping them to Europe as European demand was weak.

In China, a trader said that there was some replenishment demand, but it was "quite sporadic" and mainly compensated for shortfalls. "Margins are very low due to lack of downstream activity. So, importers are procuring less," he said.

Floating storage buildup

A large buildup in LNG vessel and regasification capacity could keep spot tanker rates low in 2023 that could provide an opportunity for floating LNG storage by late summer.

Analysts at S&P Global said in a report in late May that a TTF winter-over-summer spread of around $5.43/MMBtu could incentivize a strong buildup in LNG floating storage.

High winter-only charter rates eliminate most of the floating storage opportunity, suggesting that only buyers with longer term vessel capacity have the capability to participate.

Assuming a one-year term charter rate of around $130,000/d for a dual fuel diesel electric powered LNG vessel, S&P Global analysts estimated that an LNG trader could capture a roughly 75 cent/MMBtu spread on an August-loaded, November-delivered cargo with a 90-day float.

An LNG trader could theoretically capture an 83 cent/MMBtu spread on an August-loaded, December-delivered cargo with a 120-day float, according to S&P Global analysts.

By September, a shorter, 60-day floating storage period could net a trader $1.42/MMBtu for a November-delivered cargo, the analysts said.

India buying activity

Price sensitive downstream buyers in India are hoping for a further drop in LNG prices as natural gas production rises domestically. Their expectations have been reflected in recent tender activity.

A Singapore-based trader said he does not expect US cargo imports to be cancelled immediately as prices need to drop further. The trader said that if Henry Hub prices drop to $1.15/MMBtu excluding ship operating costs, it could reduce US imports into Asia. The Henry Hub settlement price was $2.262/MMBtu on June 6, according to the CME Group website.

An India-based importer said that JKM and WIM prices falling below $8/MMBtu could lead to the cancelation of US LNG imports into Asia.

Indian buyers have been considering buying cargoes at lower prices for future delivery. Indian Oil Corp. floated a tender closing June 7, seeking 36 cargoes to be delivered over 2024-2026.

GAIL had a swap tender for 12 cargoes for 2024. Market participants said that other importers were also considering floating tenders if prices remain favorable.

An India-based trader said that companies have been gauging end-user demand. End-users in India are meeting demand through domestically produced natural gas.

The Reliance-BP consortium concluded gas auctions for 5 million standard cu m/d for three years in May and 6 million standard cu m/d for five years in April.