The LNG spot price for delivery into North Asia is headed for a historic low in the coming months with the possibility of dropping below the $3/MMBtu level, as rising supply outpaces weak winter demand, S&P Global Platts Analytics said in its JKM weekly price forecast on Thursday.
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Record low LNG spot prices will have major repercussions for the industry, as it will be a stress test for producers with exposure to spot indexation and buyers forced to pay high oil-linked prices due to contracted volumes.
"JKM is expected to fall close to $3/MMBtu in the months ahead, which would leave the potential for sub-$3/MMBtu assessments on select days this summer," the Analytics report said.
Platts Analytics attributed the price drop to relatively weak demand growth, amid warmer than normal temperatures and weakening economic activity in Northeast Asia.
Earlier Friday, China's GDP growth for the fourth quarter of 2019 came in at 6%, and at 6.1% for 2019, down from 6.6% in the previous year and its slowest growth rate in around 30 years.
"Regional [LNG] imports have seen muted growth so far this season limited mostly to China. However, with the Lunar New Year fast approaching and a continuation of warmer than normal temperatures in the region, the heart of winter appears to be all but over," it added.
LNG MARKET DYNAMICS
The S&P Global Platts JKM price assessment for March, the new front month, was assessed at $4.275/MMBtu on Thursday, after averaging $5.296/MMBtu in February.
The lowest level for JKM in 2019 was $4.175/MMBtu in August, in one of its weakest years when the spot price could not even reach double-digits. New volumes coming to market means that 2020 is likely to be even weaker, not just for Asian seaborne gas prices, but also for Europe's TTF and the US Henry Hub benchmarks.
"Historically low JKM prices are only a part of the story, which should not overshadow the compression of global gas prices," Jeff Moore, Asia LNG Analytics Manager at S&P Global Platts, said.
He said "the cure for low prices, is low prices" and this potential for very low spot prices should start to incentivize demand and test short-run marginal costs of supply as producers struggle to cover costs. In fact, JKM prices are expected to converge with coal prices in Asia for the first time in history. Platts Analytics expects JKM to fall below NEAT (the benchmark price for delivered coal in Northeast Asia) on a dollar-per-MMBtu basis this summer, which could raise questions around coal-to-gas switching this summer.
"However, the other important factor to note here is that the market is trying to balance using only the spot market, which is extremely inefficient. With so much volume still linked to crude and sold at much higher prices, very low JKM prices can only do so much in terms of generating demand or slowing supply," Moore added.
The short-term LNG market is generally expected to constitute 25% of the overall market. Key North Asian LNG importers like South Korea's Kogas and Japan's JERA are still buying oil-linked LNG under long-term contracts that are several millions of dollars above spot levels.
Moore said JKM is likely to fall much further than most people currently believe, due to such factors.
"This could have long term implications though, as LNG, and especially spot LNG, could look enticing for Asian economies looking for relatively affordable, abundant and clean fuels. This is especially true after a second-consecutive year of relatively low JKM and would be punctuated by historically low prices," Moore said.
Asian countries expected to join the LNG club are Philippines, Vietnam and Myanmar, and others like China, India, Pakistan, Bangladesh, Singapore and Thailand will be adding more LNG import capacity in coming years.