Asian spot LNG premium to Europe narrows on weak demand

Asian front-month spot LNG prices crept up from the 40-month low reached in late July, but mild weather and abundant prompt supply staved off any significant rally on the September contract. Firm prices on European gas hubs saw the premium of Asian spot prices to their European equivalents narrow to the lowest level since December 2012.

On 15 August, the September’ 14 EAX was assessed at $10.763/MMBtu, having fallen by $0.050/MMBtu since it rolled to become the front month on 16 July. This represented a rebound from the post-Fukushima low of $10.412/MMBtu reached on 24 July, following six months of falling prices. The October EAX contract also fell by $0.050/MMBtu over the same period and was last assessed on 15 August at $11.425/MMBtu.

As the new front month began on 16 July, remaining September demand continued to soften with most utilities in Japan and elsewhere in the region citing high inventories and reduced electricity demand from mild summer weather. The highest bids for both halves of September were recorded at $10.500/MMBtu and the lowest offers at $11.000/MMBtu.

Taiwan’s CPC was understood to be taking advantage of low prices to meet demand for the end of its peak summer season, while Chinese buyers and some Japanese utilities were understood to have finite October demand. However, the overall demand picture was weakened by South Korea’s KOGAS, which continued to market its excess summer cargoes and Chubu Electric, which announced on 17 July it would restart a 1GW coal-fired plant within a month.

There was a further downward pressure on EAX front month prices from the healthy Pacific Basin supply picture. The 6.9mtpa Papua New Guinea (PNG) LNG plant reached plateau capacity in July, while Australia’s North West Shelf (NWS), Qatari sellers, Indonesia’s Tangguh and Abu Dhabi’s ADGAS all offered cargoes through tenders or bilaterally. Market sources at Japanese utilities also identified Russia’s Sakhalin as the source of a tender for late September or early October-delivery.

By 24 July the weak near-term fundamentals fed through into prices as the lowest offer for September delivery slid to $10.500/MMBtu and the front month contract was assessed at the lowest level since March 2011.

The first half of August showed signs of a gradual market recovery. Chinese buyers were understood to be in the market for October volumes to commission newbuild terminals in the south and east of the country.

In addition, higher prices for the peak winter months, for which cargoes had reportedly been sold in the $14.000-15.000/MMBtu range, also raised the attractiveness of Pacific FOB cargoes which could be used as a seasonal storage play. October and November-lifting cargoes from the NWS supply tender were heard to have been closed at more than $12.00/MMBtu in the second week of August.

In Europe, LNG prices remained robust amid concerns about gas supply via Eastern Europe for the coming winter. On 29 July, the premium of the EAX to the ICIS Northwest Europe Index (NEX) fell to $3.186/MMBtu, the lowest level since 5 November 2012.

The narrowing spread between prices challenged the economics of European reloads. FOB sellers from the Gate terminal were heard to have made offers in the $11.00s/MMBtu, a level higher than the front-month EAX contract. In late July, Spanish grid operator cancelled three scheduled nominations for reload from its Huelva terminal for August lifting, which sources linked to narrowing regional spreads. Simon Ellis/ Olumide Ajayi