Buyers question indexation amid Asian spot LNG volatility

SINGAPORE (ICIS)–A range of northeast Asian LNG buyers are reconsidering price benchmark options after a huge jump in volatility on Asian spot LNG prices in recent weeks.

Several buyers and traders said they are seeking other forms of pricing indexation for Asian LNG spot to enhance their risk management strategies.

Sources are considering using hybrid formulas for spot buying that could comprise of a blend of a northeast Asian marker with the more liquid Dutch TTF gas benchmark.

The TTF has lower price volatility compared with Asian spot LNG prices, due to much higher trading liquidity at the Dutch gas hub.

Some companies are considering blending Asian spot LNG indices from different Price Reporting Agencies with a view to producing a hybrid benchmark that could offer lower price volatility.

ICIS assesses the East Asia LNG Index (EAX) which is an average of the two front-month prices for Japan, China, South Korea and Taiwan.

Chinese state-owned major CNOOC has started to buy some spot cargoes that are linked solely to TTF benchmark, said a trader.

ICIS is the benchmark provider of TTF gas pricing.

LNG spot prices surged in the winter of early 2021 when a cold wave hit northeast Asia, boosting LNG demand for winter heating.

This was in the context of tightening supply, infrastructure issues and extremely limited shipping.

Some traders failed to deliver their winter cargoes to northeast Asian buyers, as spot prices reached record levels, said traders.

ILLIQUID LNG MARKET

The historical volatility for spot Asian LNG prices for winter delivery jumped in 2021, according to ICIS calculations. Japanese utilities scrambled to buy high-priced ultra-prompt cargoes amid domestic electricity and gas shortages.

The annualised historical volatility in 2020 was also high, as the coronavirus pandemic hit global gas and LNG demand, pushing prices down to record lows.

Asian LNG spot prices have largely been more volatile than the other key references for LNG markets for many years – European and US gas, and crude oil benchmarks.

Physical and paper trade has increased in the Asian spot LNG market in recent years but remain well below that of other key price benchmarks.

While the recent focus has been on spot trading, the discussion also applies to mid and long-term LNG procurement, where buyers are exploring a range of pure and hybrid pricing options.

The recent volatility is seen by some as a warning against using a relatively illiquid Asian spot price in more significant, longer-term trade.

Buyers are also closely studying the evolution of domestic gas and power markets in Japan, China and India which increasingly offer alternate options for indexation, although there are also questions there on liquidity.

Barriers of entry into the LNG market include the high capital cost of cargoes, the specialised and costly LNG-related infrastructures and vessels.