Spot LNG prices in East Asia for March slumped below hub price levels in northwest Europe in the second week of February as the region’s utility buyers threatened to switch to cheaper crude and fuel oil imports.
The February East Asia Index shed $2.510/MMBtu to $6.771/MMBtu during its time as front-month contract from 16 January to 13 February. The March contract fell $2.475/MMBtu over the same period to $2.475/MMBtu.
The March EAX started the period at a $2.503/MMBtu premium to the Northwest European Index (NEX), but fell to a $1.352/MMBtu discount on 13 February, as European gas hub prices climbed in response to field outages in the first half of January.
As the period opened on 16 January, sellers’ hopes of keeping prices above $9.00/MMBtu quickly receded in the face of weak regional demand, as demonstrated by the failure of end buyers to participate in Australia’s Northwest Shelf tender for Q1 and Q2 deliveries.
Japan’s electricity utilities were said to be considering switching from LNG to oil-fired generation to take advantage of lower crude prices. Any ramp-up would stand in contrast to the recent trend, which saw Japan’s largest utilities reduce combined crude and fuel oil imports to less than 60% of their 2012 levels in 2014, according to the country’s Federation of Electricity Producing Companies (FEPC).
March demand was heard in Japan from Kyushu and Tohoku Electric, although both were reportedly pushing for prices below crude oil parity. The country’s largest utility TEPCO was reported to have problems at two LNG-fired power plants, which could reduce short-term demand.
Elsewhere in the region, South Korea’s KOGAS was understood to be staying out of the market to let stocks run down amid concerns about oversupply following the milder, late-winter weather. Lower crude prices put pressure on margins for Chinese state buyers.
By 26 January, the highest bid in Japan was recorded for H2 March at $7.50/MMBtu while the lowest offer for the same period was received at $7.90/MMBtu.
Further ahead, traders said some buyers were encouraged to nominate down volumes for 2015 under their long-term contract annual delivery programmes (ADP) from April. Buyers expressed the expectation that the oversupply of spot LNG would continue to depress spot prices below the levels of oil-indexed contracts, particularly those with S-curve structures to protect counterparties from oil price extremes.
On the production side, liftings to Yemen LNG were suspended from 23 to 30 January, while second-quarter maintenance was heard to be scheduled for Tangguh train 2 at Qatargas 1 train 2. However, expectations of Pacific Basin supply availability were boosted by the lower ADP nominations as Australia’s Northwest Shelf, PNG LNG and Bontang projects all opened tenders for March or April cargoes. Russia’s Sakhalin LNG also extended an eight-cargo string over 12 months with volumes understood to have been freed up by the expiry of a mid-term deal.
Against this background, buyers’ price expectations for April slid well below the prices sellers were willing to offer. On 9 February, the highest bid for H2 April was recorded at $6.00/MMBtu, while the lowest offer stood at $7.00/MMBtu.
The EAX ended the period in a shallow backwardation with H1 March prices at $6.793/MMBtu, H2 March at $6.75/MMBtu, H1 April at $6.50/MMBtu, H2 April at $6.50/MMBtu and H1 May at $6.475/MMBtu.
In Europe, imports climbed substantially above their levels the previous year as sellers with long-term contractual positions delivered flexible volumes at the relatively robust hub prices. UK and Belgian terminals received 12 Qatari vessels from 16 January to 13 February, up from four in the same period of 2014.
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