Asian gas importers could be looking at the most expensive winter procurement period on record with some buyers testing the market earlier than usual, in anticipation of shortages this cold season.
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In the week ended Aug. 13, the largest importers in their respective markets -- Japan's JERA, South Korea's Kogas and Taiwan's CPC Corp. -- were reportedly scouring the market for winter season deliveries, starting from November.
"We have heard of many end-users testing the water ahead of winter this year as there is certainly a sense that prices could go even higher, driven by an increasingly tight market in the Atlantic," said Jeff Moore, manager of LNG Analytics Asia at S&P Global Commodity Insights.
"If we enter a scenario where northeast Asia needs to draw on significant volumes from outside the region this winter, it's possible prices could test all-time highs," Moore said.
The Platts JKM for October, the new front-month, was assessed at $59.055/MMBtu Aug. 17, up more than $12/MMBtu on the week, S&P Global data showed. In the first part of July, although still high, the daily JKM physical assessment trended between $37/MMBtu-$42/MMBtu for most of the month, with the lack of volatility bringing in some spot procurement back into the region.
Scrambling for cargoes
South Korea and Japan are among those that have been actively seeking cargoes ahead of a potential cold snap while demand from China seems to be subdued at this point.
South Korea's Kogas was heard to have purchased a few cargoes bilaterally this month following a government announcement to increase inventory stockpiles before winter, with market participants hearing that it was still actively seeking winter cargoes in the market.
Elsewhere, multiple market participants recently reported a trade for a mid-September cargo at JKM October minus 10 cents/MMBtu, although further details were limited.
Japan's JERA was heard seeking between 10 to 20 cargoes for November 2022-March 2024, indicating strong appetite for the fuel. The company was later heard to have awarded its buy tender, which closed Aug. 11, for 1-3 cargoes per month mostly on a JKM-linked basis over the winter season.
In terms of supply, some market participants noted that Malaysia's Petronas was requesting earlier delivery for shoulder-month LNG cargo delivery due to the higher likelihood of facing limited supply for peak winter season.
"A [downward quantity tolerance] has not been notified to us yet, but if they would, it would not be surprising", a Japanese importer said.
Robust competition for LNG cargoes from European buyers facing gas shortages and high European pipeline gas prices was also intensifying the challenges of securing winter volumes, sources said. This has pushed forward prices for winter derivative contracts to record highs.
Platts assessed the Winter 2022 (average of October 2022 to March 2023 prices) JKM derivatives assessment at $54.275/MMBtu on Aug. 15, up from $49.106/MMBtu at the start of the month.
However, such high prices continue to discourage procurement by most Chinese buyers who were grappling with feeble downstream industrial and manufacturing demand.
Several Chinese market sources told S&P Global that the only time they might dip into the spot market this year would be to sell cheaper long-term volumes to earn a profit. A few companies have also already secured some winter supplies by agreeing contracts earlier this year, sources said.
One Chinese importer noted that they were focusing on short-term optimization for cargoes with different delivery windows. "For the front months of winter, we are pretty well-supplied especially with pipeline gas, so it really depends on the weather," he said.
Revising plans amid shortages
Tight LNG supplies are forcing buyers to revisit their procurement strategies while prompting countries to increase reliance on other sources of energy to mitigate shortfalls as Asia is expected to compete with Europe for LNG winter supply.
"We expect to face short inventory in December, so we are probably going to do a swap around early October because we can't afford to buy a spot cargo outright. Usually, we get a good understanding of downstream demand three months ahead," a source at a Japanese gas utility said.
A Japanese LNG importer told S&P Global that they are facing hurdles because of limited supplies.
"We would like to try physical spot transactions for trading, but this is not a suitable time to do so, and we don't have any additional cargoes from long term contracts either," the importer said.
Amid a severely tight supply-demand outlook, Japan's Minister of Economy, Trade, and Industry Koichi Hagiuda said July 15 that the country will work to operate up to nine nuclear reactors by winter.
For Japan overall, the additional nuclear power generation capacity is expected to cut the reliance on LNG by around 2% winter over winter, unless colder-than-normal temperatures arrive, Moore said.
Meanwhile, GAIL, India's largest gas distributor and operator of pipelines, has resorted to rationing of LNG supplies to user industries like fertilizer and power amid higher prices, while countries such as Bangladesh and Pakistan have already been deploying several austerity measures to trim industrial activity and cut energy consumption amid restricted availability of LNG supplies.