Spot LNG price correction sees Asian buying interest trickling in

Singapore — The drop in spot Asian LNG prices for March delivery to under $9/MMbtu and better cargo availability have resulted in buying interest trickling in, especially from India, but many other buyers in the region are still hoping for prices to fall further before taking the plunge.

On the other hand, bullish fundamentals included the prospect of cold temperatures in the second half of February that could deplete gas inventories further, and strong gas prices in Europe that could see the Atlantic and Pacific basins compete for cargoes.

Indian LNG aggregators returned to the spot market, seeking February-March cargoes during the week of Jan. 23, as spot prices corrected due to fresh supply tenders and pent up demand.

The front-month West India Marker, the Platts LNG benchmark for India and the Middle East, dropped from an all-time high of $23/MMBtu on Jan. 12 to $7.60/MMBtu on Jan. 21.

Western Indian gas distributor Gujarat State Petroleum Corp issued a JKM-linked tender for March 1-5 delivery at Mundra port, but did not award the tender due to high offers and expectations of more downside to spot prices.

State fuel retailer Indian Oil Corp issued a tender for Feb. 20-March 5 delivery at Ennore with offers due on Jan. 21. Results of the tender were not immediately available.

Market participants also noted that China's largest LNG importer was offering February and March cargoes, indicating ample fuel supplies for the rest of winter.

On the sidelines

Importers in China, Japan and South Korea were still largely in wait-and-see mode, expecting lower prices. This is partly due to normalization of power demand after recent measures to ramp up supply of alternative fuels like oil and coal, and with the worst of peak winter largely over.

Japan's power demand in the first two weeks of January was 10% above year-ago levels, but this has now dropped below year-ago levels, along with day-ahead day-time spot electricity prices dropping to under Yen 40/kWh last week.

In China, energy demand in the run-up to the Lunar New Year could be tempered by new COVID-19 outbreaks and movement restrictions. Some industries in southern China said they were yet to restart operations after gas supplies were diverted to the north to meet heating demand.

A couple of second-tier end-users from South Korea and China were monitoring the market for opportunistic purchases but most buyers seemed to be expecting warmer weather and softer shipping rates. Pacific and Atlantic LNG shipping rates fell to $160,000/d and $190,000/d respectively on Jan. 21.

"We are still waiting," a South Korean end-user said. "We might have appetite for March but think there should be more room for prices to fall further. Industrial activity will be substantially reduced during Lunar New Year celebrations in China especially."

Buyers said spot supply for March delivery may not be needed if they don't see a huge drawdown of inventory levels in February. The sentiment was echoed by buyers in Seoul, Guangdong and Tokyo.

Chinese traders pointed out that trucked LNG prices were also on a downtrend since the cold snap ended about two weeks ago and would likely come down further when the heating season ends, which would cap their bids for March delivery.

Restocking demand

"With heating demand easing amid slightly higher temperatures, it appears the worst is behind LNG," Daniel Hynes, Senior Commodity Strategist at ANZ Research, said Jan. 21. "Even so, we see demand remaining robust as consumers look to protect against further demand spikes over summer by restocking inventories."

He said weather will remain an important driver over the next month or so, with China temperatures expected to fall until late February, citing the European Centre for Medium-Range Weather Forecasts.

In Japan, three nuclear plants are due to back online by mid-February, and in China increased pipeline gas and strong domestic production will also limit demand for LNG, Hynes added.

Hynes said Japan's forward power prices for February were particularly high, providing an incentive to use LNG in the Japanese power market, while coal-fired power generation has been highly utilized, with little scope to increase capacity.

Japan is unlikely to head into the northern hemisphere summer exposed to another power crisis, and it will also not be keen to curb the rebound in industrial activity, as COVID-19 vaccines are rolled out, he said.

"This will likely lead to above average imports, [as] inventories are restocked. The scarcity of cargo has caused utilities to run down inventory," Hynes said, adding that government data showed storage levels for power companies were about 40% lower than a year ago.

"So altogether, we should see the spot LNG market remain relatively tight," Hynes said. "While the panic buying caused by the cold snap subsides, robust demand and inventory restocking should see imports remain elevated. This should support the spot price in the $8–10/MMBtu range in H1 2021."