Mild weather, high inventories cloud Asia's Q1 LNG outlook

Mild temperatures and consistently high stock levels among Asian utilities continue to cloud the post-winter market outlook for LNG cargoes in the region, with procurement activity for spot volumes expected to be reduced despite significantly lower prices.

Brief periods of colder weather in December and January did little to put a major dent in the inventory levels, sources said.

"Chinese buyers appeared unaffected by the current cold snap as many factories and schools were already closing down in preparation for the approaching Lunar New Year festive season," a Chinese importer said.

Other market sources pointed out that the cold snap currently sweeping China and South Korea is unlikely to extend beyond this week.

Over 30 spot LNG cargoes were observed trading in the Asian market during the last two weeks, but sources suggest that the majority of these tenders and bilateral trades were opportunistic purchases driven by favorable price arbitrage between international and domestic prices, rather than strategic trading for demand coverage.

"We are closely monitoring prices and are ready to act if there is a drop, but we can also refrain from buying if prices do not fall,"said another Chinese importer.

Chinese buyers were expected to benefit from higher margins by importing LNG cargoes, as domestic trucked energy prices were higher than JKM, sources said. China's trucked LNG price was at Yuan 4,857/mt ($13.19/MMBtu) on Jan. 23, according to the Shanghai Petroleum and Natural Gas Exchange.

Platts assessed the March JKM at $9.544/MMBtu Jan. 25, flat week on week but down 39.5% since Dec. 1, according to S&P Global Commodity Insights data.

"The current JKM prices at around $9/MMBtu appear highly attractive, offering a positive profit margin for Korean buyers with remaining demand to fulfill from the international market," said a Korean trader who added that weak demand and a robust LNG inventory above 60% may limit their purchases, requiring continued inventory optimization such as shipment deferment and reselling.

Furthermore, Japan's Kansai Electrics seeks April 2024-Feb 2025 cargoes via a tender. Several traders said that the tender was issued to capitalize on lower prices led by the expectation of higher inventory by the end of the winter season in Asia.

"Despite lower prices, most Japanese traders are still on the selling side, and some end-users are requesting shipment deferment due to higher inventory levels," said an Asian producer.

Weak demand extends from Q4

The current market in both Asia and Europe seems to mirror the patterns observed in the fourth quarter of 2023, market sources said.

Major market headwinds include weak downstream demand in Europe, notable fluctuation in the price spread between Asian and European LNG prices, and changing global supply dynamics influenced by storage factors and freight routes.

Both JKM and NWE started to trend down during the pricing month of January LNG spot cargo in November and December 2023. The decline in JKM January is attributed to ample inventory levels and lower demand caused by mild winter weather in Asia.

Concurrently, the European market experienced a notable softening in demand, falling below expectations, with factors including slower-than-expected inventory withdrawal due to mild weather and structural weakness in commercial and industrial sectors. Additionally, increased availability of Atlantic cargoes, owing to shipping constraints in the Panama Canal, further contributed to bearish price levels in Europe, sources said.

According to data from S&P Global Commodity Insights, by the end of December, the storage fill stood at 85%, 12% higher than the 5-year historical average. As of Jan. 21, Europe's natural gas storage stands at 74.4%, still surpassing the five-year average of 67%, shown by Aggregated Gas Storage Inventory data.

Sources suggest that mild temperatures are set to return from this week until early February in Europe, limiting trading activities.

"The mild weather forecast and wind power surges in certain European countries suppress prices in Europe," an Asian market source said.

"High inventory in Europe and milder weather forecast in the next two weeks had altered market expectations regarding demand and prices," another European trader said.

Market participants foresee the possibility of the weakness in Europe affecting the Asian market in the coming weeks, potentially leading to a redirection of supply towards Asia and creating a more relaxed global supply fundamental.

Sufficient supply despite shipping constraints

Panama Canal limitations have played a crucial role in shaping the LNG trade dynamics. According to data from S&P Global Commodity Insights, the canal allows for a total of 9-10 transits per day, with only two dedicated to LNG tankers. Available booking slots declined from 10 slots to 5 by January 2024, indicating a 50% decrease in transit slots.

Multiple market players indicated that they had rerouted around the Cape of Good Hope in December and January, making the US LNG supply less competitive for the Asian market due to longer voyages and higher freight costs.

The US arbitrage opened up from mid-October to mid-November, attracting traders to trade US cargoes to Asia via the Panama Canal. The US LNG supply to the JKTC region in November 2023 was at 1.63 million mt, up by 28.3% year on year, according to S&P Global data. However, this number fell to 1.08 million mt in December 2023, equivalent to a 12.8% decline year on year, which could ultimately prove the decrease in competition of the US cargoes to Asia led by Panama Canal restrictions and subsequent closed arbitrage window for the US cargoes into Asia since mid-November.

As of Jan. 25, the arbitrage window between the US and Asia continued to be shut with the H1 March JKM/H2 February NWE spread against the USGC-to-North Asia/Northwest Europe freight rate marked at minus 35.6 cents/MMBtu, calculated based on rerouting via Cape of Good Hope(COGH), data from S&P Global showed.

Asian importers suggest that the fundamental weakness of the Asian market and its incapacity to absorb additional cargoes ensure that the market remains undeterred by shipping constraints.