Storage analysis: How much spot LNG will Japan and South Korea need this winter?
The crucial pre-winter shoulder months of August, September and October will determine the level of storage fullness at which countries start the winter. ICIS estimates that Japan and South Korea bought a combined 5.5million tonnes of spot LNG during this period last year. China alone also bought 1.5 times that combined amount in 2021. However, China is unlikely to be vying for much spot in the coming months due to the high prices and slowing economy.
ICIS Analytics forecast that Japan and South Korea combined are looking to secure slightly more than 5.0m tonnes of spot in August, September and October this year – assuming that there is not much flexibility or uplift available from their long-term contract suppliers. The spot amount is less than what was bought last year, but it is still nearly 80 cargoes of spot LNG just before winter.
To secure these cargoes during the current gas shortage happening in Europe, the North Asia spot price – the ICIS EAX – will need to close the gap with the ICIS TTF European gas price.
KOGAS will buy more spot pre-winter this year, compared to 2021, due to much higher summer storage withdrawal and a 90% storage requirement
At the time of writing, Korean energy statistics provider KESIS has confirmed that South Korea’s storage inventory is around 1.8m tonnes. This is 0.9m tonnes lower than ICIS has modelled, which is estimated to be the ‘normal’ level of inventory for previous early Augusts. Also, the mandated 90% storage fullness by the end of October will mean that an additional 0.5m tonnes will be required to fill the gap compared to the ICIS base case at the same month.
Consequently, using these numbers, ICIS Analytics predict that the country will seek to purchase 2.4m tonnes of spot this year, 0.3m tonnes more than the same period in 2021.
Japan is expected to buy less spot LNG pre-winter this year compared to 2021, but the tight power grid may be a concern
ICIS estimate that Japan’s storage inventory level should be at 4.9m tonnes at the time of writing. This is 26% higher than the past five-years average, just slightly below the record high for the same month in previous years. In fact, there are signs that a few storages could be hitting tank-top soon, creating logistical and storage management problem going into the winter.
This is likely due to several factors, such as over-stocking the summer demand and the general sentiment to maintain a high level of storage, especially when transitioning into the 2H of the year.
We expect companies to draw down another 0.6m tonnes in August as the country goes through its summer peak, followed by three months of gas input into the storage, well into November. ICIS Analytics forecast Japan to buy nearly 2.7m tonnes of spot LNG in the coming three months, 20% less than was bought in the same period last year. This will lead the country to a decent level of 4.9m tonnes by the end of October and 5.4m tonnes by November, just before the winter withdrawal season begins.
Overall, we believe that the North Asia spot market will be tight in the coming pre-winter months, as South Korea and Japan will be looking for around 80 spot cargoes to reach these storage levels, competing with Europe. However, competition would have been even stronger if China was buying more LNG, but it is currently less active and being priced out of the spot market.
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