Bearish signals lurk amid unseasonably high Asian spot LNG prices

Singapore — Asian spot LNG prices have been on an uptrend in the recent weeks following post-winter restocking and firm support from higher European natural gas prices, but uncertainty lingers over the sustainability of the rally that comes during a typical weak demand season.

The S&P Global Platts JKM for May delivery was assessed at $6.694/MMBtu on March 18, up from $5.57/MMBtu at the start of the month, and compared to year-ago levels of $3.538/MMBtu.

The rising spot prices have disincentivized buyers who were looking for shoulder season prices to drop further. Market participants are unsure whether spot LNG has bottomed out for the year, especially with no major changes in Asia's demand-supply balance ahead of the summer season.

One reason for strong JKM has been the support from high Title Transfer Facility, or TTF, prices in Europe and record high carbon prices that encourage gas burn over coal-fired power generation.

"TTF seems to be hitting the ceiling already; it's tough for it to stay at this price in summer. Some trading houses are planning to sell cargoes now and buy in the future, which shows how bearish they are," a China-based trader said.

At least one South Korean importer said buying appetite was dependent on the price trend going forward, and a trader with a European utility said the price direction for May really depended on when buyers decide to move. "It's not that there's no demand, they are just not out yet," the trader said.

"End-users who feel the ceiling for JKM is in the high-6s may prefer to wait a bit more. Up until last week, there were not many suppliers who showed their cargoes, but [by this week] more sellers have approached me. It seems like almost every seller has a cargo for May," the South Korean buyer said.

Meanwhile, Japanese importers who were selling surplus volumes recently, said their downstream demand was not particularly strong and had less need to depend on spot cargoes, as inventories had been replenished and solar power was back with warmer weather.

"As prices have gone up higher than $6/MMBtu, there is less incentive to buy, unless prices of electricity go much higher, which is less likely in the shoulder months", a Japanese power utility said.

Finding support off TTF

"It is true that JKM has seen some upward pressure in recent weeks, however, Platts Analytics expects JKM to come back under pressure again in the months ahead," Jeff Moore, Manager, Asian LNG Analytics, said.

He said earlier this year there was a significant upward pressure on prices for delivery to Asia in January, February and the first part of March which drew a lot of destination-flexible supply into the region.

"However, there is very little fundamental tightness in the market in the past few weeks as demonstrated by the relatively weak JKM-TTF month-ahead spread, which has averaged just $0.14/MMBtu through the first sixteen days of March," Moore said, adding that during that time JKM increased by more than $1.00/MMBtu, which shows that JKM is finding support off TTF.

Because Asia is net-short, JKM tends to price at a premium to European hub prices to economically incentivize volumes into the region, but this relatively narrow spread shows that there isn't a need for more supply, and the price support is largely coming from higher European hub prices supported by strong demand and record high carbon prices, he said.

"With such a narrow spread between JKM and European hubs, it's likely that more Atlantic basin supply, particularly from the US, will hit European shores in the weeks and months ahead, which will help soften prices in Europe while JKM is expected to follow suit," Moore added.

Asian demand outlook

In India, market participants were optimistic of stronger LNG demand, especially from oil-switching as crude oil prices remain supported above $65/barrel and as the country heads into summer.

Meanwhile, demand from China could depend heavily on the PipeChina situation and whether gas companies buy long-term contract cargoes from national oil companies in addition and not their spot volumes, as required by recent terminal use agreements.

"This will be a big driver of summer pricing. Currently this issue is holding back demand from China's second and third tier companies," a Singapore-based trader said.

Rising oil-linked prices will factor into spot LNG demand.

"With crude oil markets tightening globally, we increase our 2021 and 2022 oil projections toward the center of our medium-term oil price band. We now forecast Brent to average $63/b and WTI to average $60/b this year," BofA Global Research said in the week of March 14.

BofA expects $60/b Brent and $57/b WTI in 2022, up from $55/b and $52/b, respectively, but added that it still does not see spot Brent prices trading much above $70/b.