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Analysis: US LNG to Asia in question as prices fall, shipping costs rise

Highlights

Prompt JKM down 15% from Sept high at over $12/MMBtu

Asia Pacific rate at $170,000/d, highest on record

Atlantic rate of $140,000/d, highest since 2012

Houston — Falling spot LNG prices in Asia and record-high shipping rates could deter the movement of US cargoes to the region this winter as offtakers seek higher-value markets for export.

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On Wednesday, the prompt-month Platts JKM, the benchmark price for spot-traded LNG in northeast Asia, slumped to $10.20/MMBtu, S&P Global Platts data shows.

After climbing to a four-year high at over $12/MMBtu in September, the prompt-month contract has since lost more than 15% of its value, trading as low as $9.87/MMBtu earlier this month.

Weaker prices have come mostly on limited prompt-month buying interest from northeast Asian end-users in recent weeks. Falling prices for Brent crude, which sank below $80/b on Tuesday, have also made oil-linked supply contracts cheaper, putting additional pressure on the spot-market.

As the JKM continues to trend lower, record-high LNG shipping rates are also narrowing the margin for profit on US exports. On Wednesday, the Asia Pacific rate climbed to its highest on record at $170,000/d. In the Atlantic Basin, the Platts-assessed rate of $140,000/d is now at its highest since 2012.

In just the past two weeks, tightening supply in the spot-shipping market has seen rates in both basins surge from around $100,000/d to current levels. With 2018 expected to be a record growth year for the global LNG shipping fleet, the market isn't fundamentally short on tonnage. But with many chartered vessels currently unavailable for hire, there's no telling how long the spot-shipping crunch could last. EXPORT MARGIN

Record shipping costs and falling delivered-cargo prices in northeast Asia have already begun eroding the profit margin on US LNG exports to the region.

As of late October, the profit on a US LNG cargo shipped to Japan, South Korea, Taiwan or China stands at roughly $3.15/MMBtu, having declined from an annual high at over $5.70/MMBtu in September.

That profit-margin estimate, published by S&P Global Platts Analytics, includes gas feedstock and transport costs as well as shipping, canal and terminal fees, but excludes sunk-cost liquefaction.

So far this year, offtakers of US LNG have enjoyed a healthy margin to Asia, which has averaged over $3.80/MMBtu, underpinning a sizeable expansion in US exports to the region.

Through September, US offtakers have already shipped the LNG equivalent of over 365 Bcf of gas to the region, or nearly 50% more than was shipped during all of 2017.

With US LNG export capacity significantly higher this year than last, it's worth noting that the fraction of US cargoes delivered to Asia has also climbed considerably. In 2018, about 47% of US exports have been delivered to the region compared to just 37% in 2017, Platts Analytics data shows. TARIFFS

In late-September, an escalating trade war between Washington and Beijing saw China impose a 10% tariff on US LNG exports to the country, which could make cargo deliveries to Asia's second-largest importer even less profitable this winter.

At a recent energy forum, though, Cheniere Energy CEO Jack Fusco said he was confident the company would continue exporting to China, based on a long-term contractual agreement that allows state-led China National Petroleum Corporation or CNPC to import US cargoes at less than $8/MMBtu.

Fusco makes an important point.

While the current trade winds might be moving against US LNG exports to Asia, the underlying competitiveness of contracted-US LNG supply, means weaker margins and even tariffs are more likely to deter spot-market exports to the region, than end-user contracted supply.

-- J. Robinson, jrobinson@spglobal.com

-- Harry Weber, Harry.Weber@spglobal.com

-- Edited by Brandon Evans, newsdesk@spglobal.com