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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Can Summer Save LNG Demand?

In good news for buyers but dismal news for producers and traders, both Asian spot liquefied natural gas (LNG) prices, as well as European spot prices, continue to crash. According to traders, prices for the super-cooled fuel for May delivery to Northeast Asia dipped this week by 80 cents to $4.65 per million British thermal units (MMBtu). This marks the lowest price point in three years. Reuters said it’s close to the lowest point in Refinitiv records going back to 2010 of $4.00/MMBtu, which was reached in April 2016. The price drop is the 13th consecutive decline for the fuel.

LNG spot prices in Asia have also uncharacteristically dipped below spot prices in Europe, the first time this has happened since January and February 2015. LNG markets have seen decreased demand this winter, particularly in Asia, home to 72 percent of global LNG demand, amid warmer than usual temperatures, and no major LNG production outages. With winter drawing to an end, producers and traders will have to wait for hotter summer months to see demand and, hopefully for them, prices increase. Usually after the normal peak winter season, demand weakens, then strengthens again in the hotter summer months as gas is needed to meet increased air conditioning usage.

However, complicating the market is more supply coming from Australia, the U.S., and Russia, while Egypt recently re-entered the LNG market as a supplier after a hiatus of several years. Egyptian state gas company EGAS tendered to sell four cargoes of LNG for loading in April, people with direct knowledge of the matter said two weeks ago. The company is also marketing four cargoes for loading in May and three for June, Bloomberg reported, citing sources. Just a few years ago LNG producers were counting on unloading excess cargoes to Egypt. Related: Morgan Stanley: Oil To Rise To $75 This Summer

LNG prices in Europe, for their part, have also dipped below the $5/MMBtu price point due to warmer than usual temperatures this time of year, large LNG imports and a more pronounced shift to renewables than in the Asia-Pacific market. Investment bank Morgan Stanley recently said that current European gas prices are more than $2/MMBtu below the long-run marginal cost of U.S. LNG and just shy of U.S. LNG short-run marginal costs. The Asian market is sending similar signals.

“We noticed that in 2016 when global gas prices were also low, LNG output declined both locally in the U.S. as well as globally. We noted that there seems to be no decline in LNG exports from Sabine Pass in the U.S. But we also noticed that storages at Sabine Pass are now full (according to Platts) including capacity offered by berthed vessels.” Analysts with BofA Merrill Lynch Global Research said Thursday the onslaught of U.S. natural gas exports may be too much for the Asian market to digest, which means there is more pressure for European demand to balance the global markets. Related: Is Beijing Losing Its Footing In South China Sea?

Many have been counting on increased LNG demand from China to help balance global LNG markets in the mid to long term. However, the current supply overhang in markets for the fuel will persist, impacting both long-term off-take agreements as well as short term trading on the spot markets. Yet, if trade tensions between the U.S. and China aren’t resolved, several LNG project proposals in the U.S. will likely not receive necessary funding from Chinese firms nor sign long-term off-take agreements. This dynamic could also lead to a shortage of the super-cooled fuel before the mid part of the next decade.

On Wednesday, the most unpredictable president in U.S. history, Donald J. Trump, spooked markets when he warned that U.S. tariffs on $250 billion of Chinese exports are unlikely to go away anytime soon — even if the two countries reach a deal to end their trade war. "We're not talking about removing them, we're talking about leaving them for a substantial period of time," Trump said. "Because we have to make sure that if we do the deal with China that China lives by the deal because they've had a lot of problems living by certain deals."

By Tim Daiss for Oilprice.com

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