LNG Markets Analysis

East Asia Index flips to backwardation as crude
pressures LNG curve

15 January  2015 | Simon Ellis, ICIS LNG Analyst


The price of Asian spot LNG for March delivery slipped below the expiring February ‘15 assessment as buyers anticipated sharply lower rates under their oil-indexed contracts in March and April.

The February East Asia Index (EAX) contract closed at $9.537/MMBtu on 15 January, a $0.750/MMBtu fall since becoming the front-month contract on 16 December. The fall was outpaced by the March ’15 contract, which dropped $1.169/MMBtu over the same period to $9.331/MMBtu.

Despite the weakness of Asian spot prices, the premium of Asian LNG prices to those in Europe widened slightly over the period as northwest European hub prices also softened in response to falling crude oil.

February opened as the front month on 16 December amid tepid demand in east Asia. South Korea’s KOGAS was understood to be finalising supply discussions with Qatar’s RasGas to take it out of the February market, while outstanding February demand in Japan was limited to a few cargoes.

Pricing discussions focused on the effect of falling crude oil prices and the extent to which they had fed into the JCC (Japan custom-cleared) crude oil benchmark, the monthly average price of crude imported into Japan. Many contract prices in East Asia are indexed to JCC with a lag of around three months.

On 17 December, the November ‘14 JCC number was published at $86.93/bbl, reflecting a substantial fall but still implying significant headroom between February spot prices and their long-term equivalents.

Sellers also took comfort from the seeming stabilisation of crude prices above $60.000/bbl to maintain year-end offers above $10.000/MMBtu. On 19 December, the highest bid for H1 February was recorded at $9.900/MMBtu, while the lowest offer for the same window was heard at $10.400/MMBtu.

Two February trades were reportedly done over the holiday season around $10.000/MMBtu as winter storms hit Japan over the new year. By the second week of January, prices were under pressure from abundant supply and a new crude market rout.

Supply was boosted by British oil and gas BG Group, which lifted the first cargo from the first train of its QCLNG plant in Australia on 5 January. This added to new tenders from Nigeria LNG and Australia’s NWS LNG, which would potentially add four more cargoes into East Asia for February and March.

Crude prices falling below $50.000/bbl saw traders sharply lower spot price expectations for March and April. Buying interest from Japanese buyers appeared to thin out in anticipation of the new contract year on 1 April, from when they would be able to adjust the quantities of deliveries under annual delivery plans at the lower crude-indexed levels.

Despite the remaining threat of winter cold snaps, March and April deliveries fell to a discount to the prompt. On 15 January, H1 February was assessed at $9.525/MMBtu, H2 February at $9.550/MMBtu, H1 March at $9.462/MMBtu, H2 March at $9.200/MMBtu and H1 April at $9.100/MMBtu.

In Europe, the premium of the EAX to the Northwest Europe Index (NEX) front-month widened to more than $3.000/MMBtu over the New Year as the more liquid northwest European hubs rapidly reflected the crude price falls. By 15 January, the premium had narrowed again to $2.394/MMBtu, a $0.314/MMBtu rise since 16 December.

Despite the declining price spread between the basins, traders continued to find premium markets for European reloads with five full-sized cargoes lifting volumes in the second half of December and first half of January. Two of these were delivered into Turkey, one into Dubai, one into Italy for technical purposes and the last currently heading to Asia.

Despite lower levels of imports into the UK and Belgium from Qatar compared to the previous month, northwest Europe drew cargoes from a wide range of supply sources. Five non-Qatari cargoes arrived in the UK and the Netherlands in the second half of December and first half of January.

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