Analysis: Traders doubt Spanish reload outlook in May

Five reloads currently set to take place out of Spain in May will probably not go ahead because they would not make any money for their sellers, traders said this week.

“I have a feeling [the five reloads] may be cancelled like before; I can’t see any demand for them at current prices,” one trader commented.

The first reload is scheduled to take place at Barcelona at the very start of May, followed by three booked at the Sagunto LNG plant. A fifth will be at Bilbao – the first ever reload from the Basque terminal, if it goes ahead.

However, with five full reloads cancelled in February and March this year, a precedent has been set, potentially taking the number of reloads cancelled this year into double figures. One reload booked for 28 April will go ahead, however, according to port data.

Weak prices

In recent months, global LNG prices have stubbornly remained below the level at which reloads out of Spain would become profitable. This is the main reason for industry insiders believing that the May reloads are unlikely, at least on commercial grounds. Prices have been weighed down by a combination of dwindling demand and availability of new supply origins. The promise of other imminent sources of supply has also helped sap demand further out.

“In Q3 ’15, I can see that reload opportunities could exist; but in Q2 it will be very difficult in my opinion,” another AOC-focused trader said. With spot prices currently depressed across the world’s markets, a netback (the cost of reloading, shipping and fuel) high enough to make money – estimated by traders at approximately $2-4/MMBtu – would be unachievable. Spanish in-tank prices, the raw material for reloads, are currently priced at parity with most other global markets, slightly below $7/MMBtu (€22/MWh), and none of the spot LNG markets quoted by ICIS in sister publication LMD on Friday was above €7.30/MMBtu (€23/MWh).

Shippers with gas in the tanks of the country’s LNG terminals would do better by selling the AOC May into Spanish domestic market, rather than trying to carry out a hugely expensive reload, only to sell at a loss for a price only a few eurocents above AOC prices, the first trader reasoned. On Thursday, ICIS assessed the AOC front month at €21.70/MWh for May delivery. And recent figures from transmission system operator Enagas showed the proportion of imports originating from LNG exceeded that of pipelines for the first time in about a year, confirm this trend.

Lower Spanish import costs

However another view was that lower Spanish long-term contract gas import prices – which have fallen hard because they are pegged to Brent crude oil prices in Q4 ’14 and Q1 ’15 – had made Spanish reloads more competitive, by increasing profit margins. “Gas linked to Brent has dropped by 10-12% from 1 April. Maybe now [people looking to reload] are finding better spot prices in Brazil, or Argentina, or wherever,” a third trader suggested.

In other words, spot prices in the global markets, where Spanish shippers could send LNG reloads, may not have appreciated, but the a reduction in the price reference underpinning gas brought into Spain since the start of the second quarter of this year, has potentially created more profit margin for reloaders.

However, traders generally discount the idea that lower long-term oil-indexed Spanish gas imports will make reloads any more viable. For one thing, most buyers in Asia – a key market for spot LNG – are also exposed to the benefit of falling oil prices though their own take or pay contracts. This would weigh on spot prices in Asia, as they bypass the spot market in favour of cheaper contract LNG. Also, this marginal saving in procurement costs would not cover the netbacks, even to closer markets such as South American markets, one trader commented. Rob Songer