16 September 2014 | Simon Ellis, ICIS LNG Analyst
East Asian spot LNG prices climbed sharply between late August and mid-September amid growing global competition for FOB (free on board) volumes and a deteriorating outlook for alternatives to gas-fired generation in Japan.
The October ‘14 EAX contract closed at $13.381/MMBtu on 15 September, marking a $1.781/MMBtu rise since it became the front month contract on 18 August. The November contract climbed by $2.437/MMBtu over the same period to $14.487/MMBtu.
The ICIS East Asia Index (EAX) is an arithmetic average of the DES (delivered ex-ship) front month and second month ahead assessments for Japan, South Korea, Taiwan and China. The index provides a measure of the commodity’s value across the East Asia region and is a reliable LNG reference price for the region as it incorporates a wider pool of demand centres.
As the new front month opened on 18 August, demand in the East Asia appeared muted initially. For most Japanese utilities, inventories remained well-stocked as cool late August storms suppressed air-conditioning demand. South Korea’s KOGAS was heard to be marketing 10 cargoes to Japanese buyers on a swap basis in return for volumes in the second half of the winter.
On the supply side, Pacific basin plants continued to produce surplus cargoes with PNG LNG, Australia’s North West Shelf, Indonesia’s Bontang and Tangguh plants all marketing excess production for September or October delivery.
On 21 August, the highest bid for the second half of October was heard at 11.75/MMBtu, while the lowest offer for the same period was recorded at $12.50/MMBtu.By the end of August, the momentum began to swing towards sellers, as competition intensified for FOB volumes while the dependence of Japanese utilities on gas-fired generation increased.
In the Pacific basin, price expectations were lifted on the back of higher price levels in the recent North West Shelf tender. In late August, the PNG LNG plant was understood to have sold two cargoes for October delivery in the high $12.000s/MMBtu.
Meanwhile, strong competition from Brazil appeared to rule out additional supply from the Atlantic Basin, as Brazil’s Petrobras secured a free-on-board tender cargo marketed by Trinidad’s PFLE consortium in excess of $12.000/NMMBtu.
In Japan, Chugoku Electric purchased at least one October cargo due to the uncertain outlook for the restart of its 1GW Shin Onada coal-fired plant, which suffered a fire-related outage in mid-August. At the start of September, Kyushu Electric was obliged to file corrections to paperwork around the restart of the two nuclear reactors at its 1.78GW Sendai nuclear plant. Meanwhile Kansai Electric’s LNG demand was further boosted by the return to operations of the fifth unit at its Himeji gas-fired plant.
Amid relatively thin liquidity, there appeared to be limited consensus among buyers on bid levels for the front-month contract. On 1 September, the highest bid for H2 October jumped to $13.500/MMBtu, but by the following day, the highest bid for the period had fallen to $12.750/MMBtu, with the lowest offer heard at $13.5000/MMBtu.
In the first half of September, the premium for November deliveries increased, as buyers sought to insure against cold early winter temperatures. In September, Russia’s Sakhalin Energy reportedly sold a tender cargo for November delivery into Japan in the mid-$14.000s/MMBtu.
On 15 September, the EAX was assessed in contango, with H1 October at $12.725/MMBtu, H2 October at $14.037/MMBtu, H1 November at $14.400/MMBtu, H2 November at $14.575/MMBtu and H1 December at $14.675/MMBtu.
In Europe, participants turned their attention to reloads as the Asian premium to north-west European prices increased to more than $5.000/MMBtu for both October and November delivery. A first reload from the Barcelona terminal was completed on 14 September on the Cool Runner. The re-export marked the eighth conventional-sized reload from European terminals to be completed in the second half of August and first half of September.
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