14 November 2014 | Simon Ellis, ICIS LNG Analyst
Asian spot LNG prices fell to their lowest December levels since 2010 as a build-up of uncommitted cargoes in the Pacific weighed heavily on the market amid weak economic sentiment.
The continuing slump in the crude price, the authorisation of a first Japanese nuclear restart and the expectation of new plant start-ups extended the firm buyer’s market conditions onto the near curve.
The December East Asia Index (EAX) was last assessed on Friday at $11.094/MMBtu, marking a $3.269/MMBtu fall since it opened as the front month on 16 October. January ’15 EAX fell by $3.725/MMBtu to $11.263/MMBtu over the same period, reflecting further headwinds for sellers expected in the new year.
In the second half of October, sellers initially took confidence after Brent crude appeared to find support at the $86.00/bbl level after the recent heavy sell-off. On 16 October, a December DES cargo from the latest PNG LNG cargo was heard to have closed above $14.00/MMBtu while a deal for H2 January was understood to have been closed just below this level.
Demand from the usual winter sources remained muted as South Korea’s KOGAS and most Japanese utilities reported they were unable to absorb further December cargoes. It was left to independent buyers in South Korea and China, as well as China’s state oil companies, to provide some support to the market. As late as 21 October, the highest bid from an East Asian buyer was recorded at $14.00/MMBtu.
From the last week of October, momentum shifted firmly against sellers as traders confirmed PNG LNG had sold an H1 December cargo in the $12.00s/MMBtu on a free on board basis.
Abundant supply from within the Pacific Basin weighed on sentiment as Australia’s North West Shelf LNG plant opened a tender on 22 October for November and December lifting, while Qatar’s supply consortia were also heard to be actively marketing winter volumes.
Further ahead, BG Group confirmed in late October it was on track to start deliveries from its Australian Queensland Curtis LNG plant by the end of 2014, although traders claimed this had been priced in with any delays offering upside opportunities.
These alternative supplies put pressure on traders which had floated uncommitted cargoes into Asia in search of a buyer. By the start of November, around six surplus cargoes were being offered into East Asia for December delivery, with a similar number on offer in January, traders said.
On 4 November, the restart of Kyushu Electric’s 1.8GW Sendai reactors was approved by the city government in early 2015, in a move a Ministry of Economy, Trade and Industry spokesman said would relieve 1mtpa of LNG demand.
On 5 November, the results of the North West Shelf tender confirmed the downward shift in price expectations with H2 November/ H1 December-loading free on board cargoes sold at around $10.50/MMBtu and DES cargoes for H2 December delivery sold closer to $11.500/MMBtu.
By 10 November, the highest bid for any East Asian buyer for H2 December was recorded at $11.000/MMBtu with the lowest offer at $11.900/MMBtu.
Speculative sellers in Asia were offered little recourse by alternative global premium markets as Argentina struggled to absorb a build-up of contracted cargoes while higher domestic gas production muted Brazil’s LNG demand. Instead sales to portfolio sellers with positions in Asia were seen as an option for any distressed cargoes, according to traders.
The drop of Brent crude below $80.00/bbl also pressurised the near curve, as buyers weighed postponing spot procurement in favour of incremental deliveries on their February and March oil-indexed contracts.
On 14 November, the near curve was in a shallow contango with H1 December EAX assessed at $11.065/MMBtu, H2 December at $11.125/MMBtu, H1 January at $11.225/MMBtu, H2 January at $11.30/MMBtu and H1 February at $11.413/MMBtu.
Europe saw an uptick in November deliveries as the discount of hub prices to Asian spot LNG prices narrowed. The discount of the December Northwest European Index to the EAX fell to $2.820/MMBtu by 14 November, reflecting a $2.690/MMBtu fall since mid-September.
The sharp fall in the arbitrage, as well as a relative rise in Atlantic Basin charter rates, was expected to reduce opportunities for Eueropean reload cargoes in December relative to October, when Spain’s Enagas reported a record 8.52TWh of re-exported volume.
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