Arbitrage economics open door for China purchases of US LNG in September

Singapore — Arbitrage economics for sending US LNG to Asia have become favorable and September loading cargoes could see an uptick, especially to China which imported only three US LNG cargoes in June, down from seven cargoes in May, vessel tracking and price data showed.

The widening of the US-China arbitrage could give Chinese national oil companies the chance to ramp up imports of US LNG as Beijing continues to lag behind its purchase commitments under Phase 1 of the trade deal with Washington.

But the domestic demand situation takes precedence and will likely dictate actual flows of US LNG to China, not geopolitics. Market participants have also raised concerns that any arbitrage window could close very quickly if US LNG saturates Asia's well supplied market.

The arbitrage opportunity is supported by tighter Asian markets due to supply cuts, mainly from producers like the US, but also to some extent from Malaysia, Indonesia, Brunei and Australia, which has widened the LNG price contango.

The S&P Global Platts JKM for August was assessed at $2.125/MMBtu on July 6, and has been largely hovering around the $2 mark for several weeks. But the JKM derivatives for September are priced at $2.550/MMBtu and October at $3.100/MMBtu.

At the same time US Henry Hub gas is under pressure at around $1.85/MMBtu for September, leaving a spread of $1.26/MMBtu to ship to Asia in the shoulder season.

"The threat of US cargoes hitting the water before demand ramps up into the winter is a distinct downside risk to where current derivatives are pricing," S&P Global Platts Analytics said in its JKM Weekly Price Forecast dated July 2.

"Unless Asian demand picks up significantly in the coming months it's possible that new supply could put significant downward pressure on global gas prices, create a need to float supply and inject volatility into prices," Platts Analytics added.

CHINA IMPORTS OF US LNG

In June, Asian countries imported a total of 22 US LNG cargoes compared to 30 LNG cargoes in May, according to ship tracking data, and this is expected to continue dropping as the impact of US cargo cancellations seeps into trade flows.

Japan and South Korea were the top importers of US LNG cargoes in June, with six each, while China, India and Thailand absorbed two to three each. China went from importing seven US LNG cargoes in May to three in June, and numbers for following months are likely to remain low.

This will impact its commitments under the Phase 1 US-China trade deal, and any ramp-up in September will only show in Chinese imports in the final quarter of 2020.

Under the deal, China had committed to an additional $18.5 billion of purchases of US energy products in 2020 above 2017 levels, implying an annual target of $25.3 billion, according to the Peterson Institute for International Economics or PIIE.

Of the 2017 total exports of covered products, exports worth $20.9 billion were in agriculture, $50.2 billion were in manufacturing, and $7.6 billion were in energy, the PIIE said.

In the first five months of 2020, China's imports of US energy products totaled $780 million, compared with a year-to-date target of $10.5 billion, which is less than 7% of the target, the PIIE said in its analysis dated July 2.

China's energy purchases are not just lagging energy sector targets, but also other segments as it has met 49% of commitments in agriculture, 53% of manufacturing and 46% of all covered products. This leaves more room for a ramp up in oil and gas of NOCs make a concerted move.