15 July 2014 | Simon Ellis, ICIS LNG Analyst
East Asian front-month spot LNG prices have fallen to their lowest levels since March 2011 amid lacklustre demand in the region. However, traders anticipate a strong rebound in early negotiations for deliveries over the coming winter.
The August ‘14 EAX contract was assessed for the last time on Tuesday, at $10.794/MMBtu, having shed $1.394/MMBtu since it rolled to become the front month on 16 June. The September EAX contract fell by $1.675/MMBtu over the same period to $10.863/MMBtu.
The East Asian front month spot price was last assessed below $11.000/MMBtu in March 2011, in the immediate aftermath of the Japanese earthquake which caused the Fukushima nuclear disaster.
The discount of northwest European to Asian prices has decreased only slightly over the period, as LNG arrivals continued to put downward pressure on northwest European hub prices.
Lack of buyers for August
As the front month rolled on 16 June, remaining August demand appeared threadbare, as only Japanese electricity utilities and Taiwan’s natural gas monopolist CPC were cited as potential buyers.
Any demand for the month appeared adequately met by suppliers from within the Pacific Basin. Russia’s Sakhalin, Australia’s Northwest Shelf and Indonesian state oil company Pertamina all awarded tender cargoes into the region in the second half of June.
The supply balance was further tilted toward buyers by KOGAS, which continued to attempt to offload up to 40 summer cargoes in return for winter volumes.
The highest bids for August were recorded at $11.250/MMBtu on 16 June, but bids slipped to $11.000/MMBtu on 23 June. The lowest offer on the latter date was recorded for $12.000/MMBtu for both August and September delivery.
Low Japanese power demand
Despite warmer than average temperatures in the second half of June, power demand in Japan remained weak, according to power utility association FEPC.
Electricity generated and purchased from Japan’s ten main public electric utilities fell by 1.6% year on year in June, marking the third consecutive month of declining power demand, according to the industry body.
By the second week of July, traders were unable to identify any further August demand, nor a substantial up-tick in activity for September. On 11 July, the highest bid for both halves of September was recorded at $10.500/MMBtu, and the lowest offer at $11.000/MMBtu.
Instead, discussions turned firmly to the upcoming winter season, where demand projections were expected to be significantly stronger. By the start of July, indicative bids for November and December were reported at around $16.000/MMBtu, while the lowest offers were heard in the mid-$17.000/MMBtu range.
A string of cargoes was also understood to be marketed for the first quarter of 2015 at 14-15% Brent crude oil-indexation.
One factor contributing to the anticipated rise in prices is the potential ramp-up from September of Sinopec’s Qingdao terminal, which is expected to absorb incremental cargoes from the PNG LNG plant in addition to its 2mtpa contract.
The furthest forward EAX half-month contract, H1 October, was assessed at $11.500/MMBtu on Tuesday, standing at a $0.637/MMBtu premium over H2 September.Despite the weakness of Asian prices, the premium of the EAX to the Northwest European Index (NEX) fell only by $0.352/MMBtu month on month, to $4.601/MMBtu on 15 July. A total of eight LNG tankers arrived in the UK in the second half of June and in the first half of August, including seven from Qatar.
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