Asian LNG Buyers Welcome Easier Winter Market
Asian buyers of liquefied natural gas (LNG) face the prospect of lower import costs over winter for the first time since the Fukushima nuclear disaster in 2011, as rising supplies and steady demand narrow a supply shortfall.
Reuters analysis of supply and demand figures from exporters and importers shows Asia will be only slightly short of long-term contracted LNG volumes from October through March. If temperatures remain at or above average as forecast, the region could even be oversupplied for the first time in three years.
The projections from the buyers and sellers, adjusted for the six-month period, indicate the region will need around 111 million tonnes (5.3 trillion cubic feet) of LNG to cover its winter needs, about the same as the last two years.
With long-term winter supplies to Asia having risen by 10 percent a year since 2001 to 97 million tonnes this year as new projects came online and were parceled out to utility companies, the region will be short just 14 million tonnes. This compares with shortages in recent winters of more than 20 million tonnes that had to be covered by costly spot purchases.
Traders said that this year's smaller winter shortfall can be met by using stored gas, buying LNG at spot prices that are near three-year lows, and by switching some power generation to other fuel sources, such as coal or nuclear.
"The spot price will be lower compared with previous winters and demand itself is very weak," said Hiroki Sato, general manager in the fuels department of Chubu Electric Power Co, one of Japan's biggest importers of LNG.
The only thing that might change that scenario, according to Sato, is if Russia cuts off gas supplies to Europe over the ongoing Ukraine crisis, which would disrupt global LNG demand.
Spot prices for Asian LNG have fallen 14 percent since September to under $13 per million British thermal units (mmBtu), compared with around $19 per mmBtu last November and a multi-year high of $20.50 in February.
"We doubt LNG prices can trade above $18 this winter as the balance is significantly weaker than last year," Bank of America Merrill Lynch said in a research note.
Oil prices have also slumped, due to a combination of rising output and cooling demand, and this pushes down the price for long-term LNG as well, because Asian buyers typically pay prices based on a link to crude values.
"Contract prices will go down, so it is also better for buyers to exercise the upward flexibility (in contract volumes) rather than tap the spot market," Sato said.
Chubu has about one month of supply in storage, Sato said. Other Japanese industry officials said gas stocks were healthy and they weren't concerned about supply risks over the winter.
"These buyers are traditionally quite focused on security of supply, the Japanese and Koreans, so coming into winter they'll look to fill up storage regardless, particularly if they think spot prices are low," said Nicholas Browne, a senior analyst with Wood Mackenzie.
Meteorologists say that most of the northern Asian hemisphere, including Japan and South Korea, is expected to have mostly average to above average temperatures in the three months through January.
After the peak winter season is over for LNG, the narrowing supply shortfall may have an even greater impact on spot prices towards mid-summer, a time when prices dropped to nearly $10 per mmBtu this past July.
"After winter the LNG market loosens up considerably, which may lead to another big seasonal price plunge," Bank of America Merrill Lynch said.
Further out, with more LNG projects scheduled to come online in the United States and Australia, regional tightness may be over until there is another big jump in Asian demand.
Asia takes about 70 percent of the world's LNG deliveries, with Japan and South Korea the two biggest LNG importers. China, India and some Southeast Asian countries are building new import terminals, although many are underutilized as countries find piped gas supplies or turn to cheaper coal.
Beyond an exceptionally cold winter, analysts said LNG markets could be disrupted by any cut-off of Russian gas supply to western Europe over the crisis that has pro-Moscow separatists pushing for independence in eastern Ukraine.
Russia meets almost a third of Europe's gas demand and nearly half of those supplies are sent via Ukraine.
Any reduction in those piped gas supplies would send buyers such as Germany's E.ON, Britain's Centrica and Italy's ENI chasing after LNG cargoes that might otherwise head to Asia.
BY AARON SHELDRICK AND HENNING GLOYSTEIN (C) Reuters 2014.