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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Record High LNG Prices Could Result In Demand Destruction

  • Asia’s spot LNG prices have exceeded a key psychological threshold.
  • Rallying LNG prices have seen a massive 870% surge since their lowest levels this year.
  • As tight markets push prices higher, some customers are looking to alternative fossil fuels to keep up with energy demand

Driven by the global energy rally, Asia’s spot liquefied natural gas (LNG) prices exceeded this week the psychological threshold of $50 per million British thermal units (mmBtu).  The $56.326/mmBtu price of the Platts benchmark Japan Korea Marker (JKM) for November was an all-time high at which a cargo of LNG traded in the Asian market, and was more than $20/mmBtu higher than the previous record of $34.52/mmBtu, set just last week

Rallying LNG prices have already seen a massive 870-percent surge since the low for 2021 at $5.80/mmBtu at the end of February, Reuters columnist Clyde Russell notes

Few cargoes are traded at record-high prices, Russell says.  

However, rallying spot LNG prices—even if not as high as $50—have already started to destroy demand, analysts say. Price-sensitive buyers in Asia, such as India, Pakistan, and Bangladesh, are largely steering clear of the spot LNG market at prices above $20/mmBtu, let alone $50/mmBtu. More buyers are looking to lock in more volumes under long-term contracts to avoid the immense volatility of spot prices. 

Last year’s low spot prices during the peak lockdowns globally in the spring were a boon to Asian importers, but this year’s rally is hurting them—a lot. So, most are not rushing to buy on the spot market.  

Even the top LNG exporter in the world, Qatar—which sells its fuel under long-term contracts—considers current prices “unhealthy” for both producers and consumers. 

Spot LNG demand is already eroding at some Asian importers. Yet, China is buying whatever the price in an “at all costs” spree in order to prevent further power outages and factory closures that could slow its economic growth and worsen global supply chain bottlenecks. 

Over the next few months, the two key factors for spot LNG prices in Asia will be whether China will continue to pay for energy supply whatever the cost, and how cold the winter will be. 

Related: The Real Reason OPEC+ Refused To Boost Production Further Chances are that Chinese companies will seek additional LNG cargoes on the spot market, especially in a colder-than-normal winter like last year. But other importers such as India and Pakistan have already signaled their tolerance for high prices is limited. 

This winter, we may see if China’s energy demand in tight global energy markets will single-handedly support spot LNG demand. 

Other LNG importers are definitely not okay with record-high spot prices. India, which currently gets around half of its LNG supply under long-term contracts, is looking to make more such deals to avoid spot price spikes, petroleum secretary Tarun Kapoor told local outlet Economic Times.

Pakistan, for its part, is likely to slash spot LNG purchases this winter to avoid the record-high prices, which could result in a gas crisis in the country, Pakistani outlet The Express Tribune reports

Utilities in Asia are switching from gas to oil, as Asia has more flexibility in burning oil at power plants than Europe, where steep carbon regulations limit European utilities from burning oil, Rystad Energy said last week. 

“If the gap between LNG and oil prices remains wide, Asia is set to boost oil demand by 400,000 barrels per day on average over the next two quarters,” Rystad Energy said in a report

Related: WTI Oil Price Breaks $80 For The First Time Since 2014

Natural gas prices have already reached the level which destroys demand and growth, Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in a commentary this week.  

“While no shortages have yet been detected, the market is currently being driven by panic and increasingly worse market conditions with regards to the level of liquidity,” Hansen said. 

“Without a response from producers, the only other option is for prices to reach levels that triggers demand destruction, and that is the phase we have now entered,” he added. 

How high spot Asian LNG prices could go may largely depend on how high the European gas price benchmark at the Dutch TTF hub will rise, traders told Argus this week.

If this winter is anything like last winter’s colder than usual temperatures both in Asia and Europe, all bets are off. Demand for LNG will likely jump as utilities in China, Japan, and South Korea may have to go spot shopping in the coldest months of the year, pushing high prices even higher.

By Tsvetana Paraskova for Oilprice.com

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