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Analysis: Strong JKM prices to drive US LNG to East Asia this summer

Denver — US LNG exporters should deliver a record number of cargoes to East Asiathis summer, thanks to the region's unseasonably strong gas prices, whichare likely to remain elevated through next winter.

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On Friday, the Platts JKM for July-delivered cargoes was assessed at$9.60/MMBtu. That anomalously high price has been exacerbated recently as certainportfolio players move to cover short positions. More fundamentally,though, elevated crude-linked contract prices and continuing strength inspot-market demand from China are largely behind the recent run-up inprices.

In contrast to previous shoulder seasons, Asian LNG prices have actuallystrengthened this spring and are at their highest, seasonally, dating back to2014, S&P Global Platts data shows.

In recent years, the Platts JKM has reached annual highs around$10/MMBtu during the peak-demand months of winter, followed by significantlylower prices from April through October. Last May, for instance, the indextraded at an average $5.59/MMBtu. This May, the JKM averaged $8.68/MMBtu.

But this season's elevated prices look like more than just a flash in thepan.

With crude-linked contracts now valued in the mid-$10s/MMBtu and strongChinese demand expected to continue, forwards markets are betting onprices at over $9/MMBtu through first-quarter 2019.

Those price levels should drive a record share of US cargoes to consumersin East Asia this summer, with South Korea, China and Japan likely toimport the majority of those volumes. US CARGOES ALREADY TARGETING SOUTH KOREA, CHINA, JAPAN

Through May, US exporters have already shipped the LNG equivalent ofroughly 196 Bcf of gas to consumers in East Asia this year.

To put that number in perspective, consider that total exports in 2018have amounted to just over 406 Bcf, meaning that nearly half of all UScargo sales have targeted East Asian buyers this year.

Over the same period last year, US offtakers shipped a significantlysmaller volume to Asia, totaling roughly 65 Bcf, owing partly to theindustry's smaller capacity. Taken as a percentage, though, volumesdelivered to Asia from January to May 2017 accounted for just 30% of thetotal, 257 Bcf exported.

Based on recent export trends, it's likely that South Korea will continueto import the majority of US cargoes delivered to East Asia, followed byChina, Japan, Taiwan and Thailand. PROFIT-MARGIN TO ASIA AT HIGHEST SINCE MID-FEBRUARY

Currently, the estimated profit margin on US LNG cargoes delivered toEast Asia's JKM market is now just shy of $4/MMBtu, or its highest sincemid-February, according to S&P Global Platts Analytics data.

That profit calculation -- which includes gas feedstock and transportcosts, shipping, canal and terminal fees -- typically reaches levels above$3/MMBtu only during the elevated-demand months of winter.

Compared to the margin on cargoes delivered to the Middle East/India andEurope, Asia is currently outperforming those competing markets by 27cents/MMBtu and 87 cents/MMBtu, respectively. -- J. Robinson, jrobinson@spglobal.com

-- Edited by Jim Magill, newsdesk@spglobal.com