20 December 2016 | Ludovic Aldersley, ICIS LNG Analyst
LNG demand from China and South Korea, as well as Australian supply outages, helped raise East Asian spot LNG prices to the largest month on month gain since the peak of the last super cycle in February 2013.
The ICIS January ’17 East Asia Index (EAX) was assessed for the final time at $9.20/MMBtu on 15 December, climbing $1.95/MMBtu since becoming the front month on 16 November. It was the largest month on month gain in almost four years, harking back to a time when the EAX peaked at $21.43/MMBtu.
The front-month EAX in 2016 has, to date, averaged $5.59/MMBtu, but has been on the ascendency since mid-September. Appetite from South Korea, which has sought spot LNG to replace the loss of nuclear power generation, has been central in pushing up prices from below $5.50/MMbtu in mid-September, to above $7.00/MMBtu by mid-November.
The second half of November held relatively steady as most market participants adopted a wait and see attitude, until the award of a large buy tender from Egypt’s state-owned importer.
Buyers had expected that some bearish pressure could develop once the losing parties in the Egyptian tender placed more supply into the early 2017 market.
Additionally, the ramp up in supply from the US, following Autumn maintenance at Sabine Pass, proved more rapid than expected. November saw the two-train plant record its biggest monthly export total since coming online this year, according to analytics platform ICIS LNG EDGE.
However, when news emerged of an unplanned outage at Australia’s Gorgon LNG plant on 30 November, it became clear that supply portfolios in the Pacific were tighter than expected. Suppliers from Gorgon became buyers, making swift purchases at premiums to all previous bids to replace lost production.
With purchases for volumes originating from the Atlantic basin, the EAX went from the low $7.00s/MMBtu to breaking the $8.00/MMbtu mark within three working days at the beginning of December.
At the time, an unplanned outage was still in effect at Angola, and Brunei LNG was only just recovering from a power failure, whilst planned maintenance at APLNG train 2 further constrained exports from Australia.
The prospect of a tighter supply picture also coincided with a step change in Brent crude prices. The ICIS Brent Feb’17 jumped from $8.19/MMBtu on 30 November to $8.97/MMBtu on 1 December, as non-OPEC producers committed to cuts with OPEC. Brent Feb’17 was up to $9.34/MMbtu by 15 December - equivalent to $55.37/bbl. With the EAX Feb’17 holding a $0.10/MMBtu contango with January, it means spot LNG in east Asia is now at parity with oil.
While South Korea was scheduled to return four nuclear plants to commercial production in the week of 12 December, limiting the amount of LNG its state importer would buy in its latest tender for supply over January and February, gas inventories were viewed as still needing replenishing after heightened consumption. KOGAS closed it fourth spot tender in as many months on 12 December, with Japanese and Chinese buyers also vying for volumes in the spot market.
Shortfalls in production from Qatar’s Ras Laffan also raised some concern, as LNG EDGE showed the rate of loadings dropping in early December compared with the same period in 2015, and also relative to the plant’s 12-month average.
Market sources said it was unclear whether any scheduled or unplanned maintenance was having an impact on production, but did say “Qatar is out of flexible volume for January/February.”
In theory, as spreads between the EAX and the ICIS Northwest Europe Index (NEX) widened, European re-exports can be used as a marginal supply source to the market. However, traders cautioned there was little LNG volume available in tank to re-export. With Europe seemingly well supplied from local production or nearby pipeline imports, LNG initially intended for Europe but diverted from source may be more likely. The arbitrage between the EAX and NEX for Feb ‘17 delivery rose from $1.60/MMBtu on 16 November, to $4.10/MMBtu on 15 December.
Data from LNG EDGE shows that Europe’s largest receiving terminal, South Hook in the UK, has received five less cargoes in the 30 days to 15 December 2016 than over the same period last year.
By Ludovic Aldersley
LNG Analyst, Global, ICIS
Ludovic Aldersley has been involved in energy for eight years, and in LNG specifically, for over five. After spending two years in the upstream commercial department of a large gas producer, he switched to cover LNG for the market intelligence and price reporting agency, ICIS, formerly known as Heren.
From reporter to deputy editor of the flagship LNG publication, he covered all aspects of the global LNG value chain, from long-term sales and purchase agreements (SPA) to the single-cargo delivered ex-ship (DES) and free on board (FOB) spot market. Within the value chain, his specialisation has been on LNG shipping and the charter market.
From investigative journalism to analyst, he has become responsible for the improvement and maintenance of an analytics platform that launched in 2015 which fuses together three core strengths within ICIS Energy.
Ludovic has led the development of a charter database at ICIS Energy and has been closely involved in expanding the range of LNG services ICIS provides: from a one-stop shop window of analytics, proprietary ship-tracking services, as well as a suite of small-scale LNG products for emerging markets.
He graduated with a Bachelor of Science Economics degree from the Universities of Bristol and Toulouse in 2007.
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Bearish European gas hubs keep re-load option open