At the start of 2021, the price for LNG in Asia is experiencing violent gyrations, with cargoes sold in recent days fetching historic prices. LNG prices in northeast Asia are up more than 80 percent in just two weeks.
A combination of factors has led to an extraordinary tightness in the market for LNG, capping off a wild bust-to-boom swing in a little over six months. However, the duration of the current price surge is unclear.
Mid-2020 LNG bust quickly shifts to shortage
After the onset of the pandemic in March 2020, and the subsequent global lockdown, natural gas markets went into a deep freeze. LNG prices crashed amid a crush of oversupply, with JKM prices – the main price marker in northeast Asia – crashed below $2/MMBtu for a period of time, a historically low price.
There was simply too much gas and not enough demand as economies went into hibernation. Between April and November, at least 175 LNG cargoes from the United States were cancelled – buyers were willing to pay cancellation fees rather than buy unnecessary cargoes.
The global LNG market suffered through an emphatic bust in 2020, and only one new LNG project received a final investment decision, the weakest level of investment in two decades.
Towards the end of 2020, LNG started to rebound. But the modest rally up to $6, $7 and $8/MMBtu for JKM pales in comparison to recent trades in the early days of 2021. As of January 8, the average price for delivery to northeast Asia for February shot up to $21.45/MMBtu, according to Reuters and S&P Global Platts, up nearly 50 percent from a week earlier. Since the JKM marker debuted in 2009, prices have never reached that high. Industry analysts say at least one cargo appears to have sold for an eye-watering $33-$36/MMBtu.
In just two months, the LNG market went through a complete 180-degree rotation.
Because LNG is selling for such high prices, cargoes that may have gone elsewhere are being rerouted to Asia. That, in turn, drives up prices everywhere, even if local supplies looked comfortable up until recently. Prices in Spain recently topped $18/MMBtu, a record high for that region. “In just two months, the LNG market went through a complete 180-degree rotation,” Kpler said in a report.
There are a few reasons for the unfolding boom. The northern hemisphere is experiencing a much colder-than-usual winter, especially in Asia, forcing up demand for heating.
Another reason is that LNG supply has been offline. In recent weeks, unplanned outages at LNG export facilities have appeared in Australia, Malaysia, Qatar, Norway, Nigeria, and Trinidad and Tobago. Goldman Sachs wrote in a note that global balances were 13 million tonnes per year of capacity (mtpa) tighter than anticipated due to these unexpected outages. The bank estimates that around 14.5 mtpa will remain offline in the first few months of 2021, leaving the market “vulnerable to cold spikes through 1Q21.” The Panama Canal has also seen congestion, delaying cargoes and stretching supplies.
Meanwhile, unlike the western hemisphere, major economies in Asia are doing pretty well, having staved off mass infections of Covid-19. That means that in addition to cold weather-related demand, economic activity is strong, another source of demand. Both China and Japan are now seeing their electricity grids stretched, resulting in power curtailments.
China’s import demand for LNG surged by 14 percent in December, compared to the same month a year earlier. The jump in demand may have caught the market off guard, and buyers have been competing with each other on the spot market, leading to a bidding up of prices.
Spot rates for tankers used to ferry LNG around the world have also skyrocketed. Bloomberg reports that BP chartered an LNG vessel in the first week of January at a rate of $350,000 per day, blowing through a previous record high price for any type of commodity set in 2019 at $308,000 per day.
Price spike may be temporary
Despite the historic rally, prices are already at unsustainable levels. Japan is running power plants at lower levels because it is too costly. Goldman Sachs estimates that LNG has become so expensive that Japan will lean on oil and petroleum products for power generation temporarily.
S&P Global Platts reports that Indian buyers are staying away from the LNG spot market because it is currently too expensive. Throughput at Indian import terminals could fall by 10 percent to 12 percent in the first quarter as a result. “The quick change in the market dynamics has taken Indian LNG buyers by surprise. A lot of Indian buyers can’t afford to pay these prices. We will see demand destruction across various sectors,” a senior official at a leading Indian LNG firm, told S&P.
Some of the factors driving prices up will likely prove fleeting.
Also, some of the factors driving prices up will likely prove fleeting. Weather is expected to moderate towards the end of the month. Supply that has been offline for maintenance will come back. Royal Dutch Shell announced on Monday the restart of its Prelude floating LNG ship in Australia, a major facility that had been offline for maintenance. Loadings have recently increased from Qatar and Russia, according to Goldman. U.S. LNG exports hit record highs in December as prices shot up. Those cargoes take several weeks to reach their destination, so the impact will soon be felt.
Goldman Sachs forecasts JKM prices for the first quarter at $12.65/MMBtu, a sharp increase from its previous estimate of $7.40/MMBtu, but lower than prevailing futures of $14.34. The bank said in a separate report in December that while the price rally was “too much too soon,” the bank nevertheless sees “this emerging fundamental tightness is here to stay for the next few years.”
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