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LNG at $25/MMBtu triggers fuel switching, stifles spot market activity in Asia

Highlights

Importers say price level is 'extreme' for this time of year

Buyers shying away from spot LNG procurement

Utilities switching to coal, fuel oil amid gas price surge

Asian spot LNG prices surging past $25/MMBtu have sent the region's biggest natural gas importers scrambling to hedge energy price exposure for winter, dampened spot market interest and accelerated switching to alternative fuels.

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Japanese LNG importers said the price level was "extreme" for this time of the year and at least two city gas utilities said companies were not seeking spot LNG cargoes because of slow domestic demand amid the coronavirus pandemic.

One source with a Japanese power utility said it had secured sufficient LNG cargoes for winter but the price level was a "little scary" amid signs of tightening supplies in Asia and Europe, and buyers could switch to cheaper coal.

Several Japan's power utilities -- which typically require a two-month lead time to adjust their LNG receiving volumes to balance their requirements -- have already moved early to secure fuels for winter, with some domestic fuel oil procurements happening even through summer.

The wild-card will be the weather forecast for December-February, with indication of normal winter weather so far. Japan tends to experience colder winters when it is hit by the La Nina weather phenomenon, but there is so far a low probability of this happening, according to the preliminary outlook released Sept. 10 by the Japan Meteorological Agency.

Chinese importers said both the Atlantic and Pacific basins were fighting for cargoes, and the European gas market was extremely sensitive, but demand-wise Asia wasn't very bullish.

"The strong support for JKM hasn't been enough to widen out the JKM-TTF front month spread, which showcases how fragile the demand situation is in Asia amid reports of end users shutting down facilities," Jeff Moore, Manager, Asian LNG Analytics at S&P Global Platts said.

He said price-sensitive supplies are likely to start to re-orient toward Europe, which could temper the upside for prices once volumes show up.

"That said, it's unlikely that the arb from the Atlantic to the Pacific can collapse or turn negative for a significant period of time, given the relative short positions for portfolio players in Asia as well as the onset of inelastic heating demand as we move into the winter," Moore added.

"TTF is going up and up, any downward moment seems temporary," a Singapore-based trader said, adding that the European market is fundamentally right and people are putting more risk premium into winter now, and anxious about Asia pulling cargoes away.

China, South Korea temper demand

In China, trucked LNG prices, which reflects the spot LNG market, stayed broadly unchanged at around Yuan 6,000/mt in the week of Sept. 16, ignoring the spike in JKM, with traders saying weak domestic demand cannot support a further price hike and trucked LNG sales dropping by 10%-20% this month.

China's LNG demand has been shrinking after trucked LNG prices exceeded Yuan 5,000/mt in late July, resulting in higher inventories at many LNG receiving terminals, according to domestic trade sources. Yuan 6,000/mt is the highest that many industrial users can afford, and the import cost for October-delivery spot LNG cargo has risen to nearly Yuan 8,500/mt based on the value of $25/MMBtu.

Chinese LNG importers have mostly remained on the sidelines as they are well-stocked for autumn and winter. One Beijing-based market participant turned down state-importer CNOOC's offer for a November-delivery LNG cargo saying, "I doubt if anyone will buy spot cargoes at such a crazy price,"

Chinese national oil companies like Unipec and CNOOC were seen selling spot cargoes, for November delivery but at the same time there are concerns that if prices rally deeper into winter, industries could shut, as the government will prioritize for residential heating.

Meanwhile, in South Korea, the country's largest LNG importer, Kogas, has raised its cheaper oil-linked term offtake to replace high-priced spot volumes.

Kogas has not been affected by the spot price surge because 70% of its purchases are based on term contracts, and it is currently holding enough stockpiles because it has increased LNG imports in recent months, an official said. Kogas' LNG imports rose 11.6% year on year to 19.331 million mt for the first half of this year, from 17.314 million mt in the same period last year, official data showed.

The official expects spot prices to fall "as supplies increase sooner or later," and said the company may reduce LNG imports if prices keep rising and weakens demand.

South Korea's Ministry of Trade, Industry and Energy indicated it would raise domestic prices of natural gas, saying that city gas prices have been frozen for a year and a half despite higher import costs.

An official with a private Korean power utility and city gas provider said local LNG importers other than Kogas had reduced LNG imports by around 5%-6% so far this year due to higher prices and can reduce further purchases if price keeps rising.

Price pressure in South Asia

In India, high prices pressured gas consumers in the power, fertilizer and city gas, sectors and may force industrial piped natural gas companies to raise domestic prices. Western Indian gas distributor Gujarat Gas raised its prices by 12% a month ago, analysts said.

Pakistan, whose dwindling gas reserves increased its dependence on LNG imports, has been struggling to award multiple LNG tenders due to high spot prices.

Pakistan can ease the impact of high spot LNG prices by diverting LNG from the power sector, priced at around 13.37% of Brent to the domestic and industrial sectors, Fahad Rauf, director research at Ismail Iqbal Securities, a Karachi based brokerage house, said. This will allow the power sector to burn cheaper coal, although it adds to pollution during winter. "Nonetheless, increasing reliance on furnace oil-based power generation during winters is the only way forward in the short term," Rauf said.

Atif Zafar, economist and director research at Topline Securities said high domestic energy prices have led to higher costs for industries and the government, as the gas circular debt on subsidizing LNG has surged to Pakistani Rupee 750 billion ($4.5 billion).

Reliance on fuel oil for electricity generation could increase by 12% to 3.3 million mt in fiscal year 2021-22 (July-June), said Abdur Rafay, research analyst at Pearl Securities, said.