15 December 2014 | Simon Ellis, ICIS LNG Analyst
Front-month Asian spot LNG prices recovered from a four-year low in the first half of December amid sharp drops to below-normal temperatures in the region and a revival in spot market activity by South Korean state buyer KOGAS.
The ICIS January ‘15 East Asia Index (EAX) was last assessed at $10.069/MMBtu on 15 December, having recovered from a four-year low of $9.325/MMBtu at the start of the month. The drop marked a fall of $0.831/MMBtu since it opened as the front-month contract on 17 November.
The gap between Asian and northwest European prices narrowed to its lowest post-Fukushima disaster level, increasing deliveries to Europe and limiting reload opportunities.
As the period opened in the week beginning 17 November, interest in January was limited in Japan, which was confirmed to have entered recession in the second quarter. Instead, traders cited some demand from portfolio sellers looking to optimise short positions into Japan and South Korea by securing cheaper spot cargoes.
On 19 November, the lowest offer for H1 January was made at $10.700/MMBtu, while no firm bids could be sourced for the month. On the same day, bids for both halves of February were made into Japan at $11.000/MMBtu, indicating the focus of demand had already shifted to the later month.
LNG procurement by Japan’s largest electricity utilities fell 9.3% year on year to 4.55m tonnes in November, according to data published by the Federation of Electricity Producing Companies of Japan on 12 December. Power generation from thermal fuels fell to previous-year levels for the fifth consecutive month, the same data showed.
With little clear demand to support them, January prices continued to slide as new sources of supply emerged. On 18 November, Northwest Shelf (NWS) LNG opened a tender for at least four cargoes for late December and early January delivery. In the same week, Nigeria LNG and Sakhalin launched tenders for a late December FOB (free on board) cargo and a three-cargo strip for January and February respectively.
On 25 November, sellers were marketing at least seven cargoes on a prompt basis into East Asia, sources said. By the same date, the lowest offer for both halves of January fell to $10.000/MMBtu in anticipation of lower price levels emerging from the tenders.
By the start of December, the latest downward jolt in the crude price to just above $70.000/bbl added pressure on the EAX curve. A February cargo was understood to have been sold into southern Japan in the mid-$9.000s/MMBtu and by 3 December, the highest February bid was recorded at $9.250/MMBtu with the lowest offer at $10.000/MMBtu. On the same day, the East Asian front-month contract fell to $9.325/MMBtu, its lowest level since 15 October 2010.
However, renewed spot buying from KOGAS and steep drops in temperature added some relief to sellers. Having remained largely out of the open market for spot cargoes over the winter, the South Korean import monopoly was understood to have secured cargoes from both the NWS and Sakhalin tenders.
Meanwhile, below-normal temperatures in South Korea and Japan added to hopes of inventory space being opened up for spot volumes. All but Japan’s two southernmost regions had a 60% probability of colder-than-normal temperatures from 13 December to 12 January, the Japan Meteorological Agency predicted on 11 December. The agency continued to forecast a 40% change of temperatures in southern and central Japan charting above the average range in January and February as a whole.
Despite the revival, the far curve remained under pressure from the expected start-up of BG Group’s Australian Queensland Curtis LNG (QCLNG) plant, which appeared set to load a first cargo in the third week of December. Further falls in the spot crude oil price were also expected to further depress the cost of incremental oil-indexed contractual LNG deliveries in March and April.
On 15 December, the curve stood in a shallow contango, with H1 January assessed at $10.025/MMBtu, H2 January at $10.113/MMBtu, H1 February at $10.325/MMBtu, H2 February at $10.450/MMBtu and H1 March at $10.500/MMBtu.
In Europe, flexible deliveries remained robust as the price spread between the front-month Northwest European Index and EAX fell to $0.472/MMBtu on 1 December, its lowest level since March 2011, before widening again to $1.726/MMBtu by the 15 December. The price drop also limited arbitrage opportunities for European reloaders, with several Spanish market participants said to have opted to regasify rather than re-export in-tank volumes. A total of seven conventional-scale reloads were lifted from Spain and Belgium in H2 November and H2 December.
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