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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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LNG Market Just Saw Demand Collapse In This Key Nation

The steady collapse of international natural gas prices has been one of the most important -- but least reported -- commodities stories of the past year.

And news late last week shows things in this market are likely going to get worse before they get better.

That development came in Japan -- the world's most critical market when it comes to consumption of liquefied natural gas (LNG), with one of the country's biggest users reporting that its demand for natgas is falling faster than anyone anticipated.

As reported by Platts, Tokyo Electric Power Corp (Tepco) -- one of Japan's leading fuel buyers -- reported Friday that its LNG purchases have plummeted so far this year. With the utility's total LNG buying under spot and short-term contracts down 32 percent for the April to September period, to 2.72 million tonnes. Related: Can Russia Withstand Saudi Onslaught In The European Oil Market?

The really interesting line in the data was Tepco's LNG purchases in the spot market, which have been almost non-existent this year -- falling to just 130,000 tonnes during the April to September period, down 90 percent from the 1.28 million tonnes the utility bought on spot during the same period of 2014.

Such spot purchases had been a major driver for LNG prices the last few years. The Platts chart below (posted on my Twitter account last week) shows how strong buying at this time last year was keeping the "Japan-Korea Marker" (JKM) price supported above $10/MMBtu.

The Japan-Korea Marker (JKM) price for LNG shipments has collapsed the past year Related: IEA Sees No Oil Price Rebound For Years

The drop off in purchases the last several months however, has cratered the JKM price for LNG shipments. Bringing rates almost in line with land-based natural gas shipments at markets like the UK's National Balancing Point (NBP - purple line in the chart).

The really concerning thing for LNG shippers is -- supply is about to surge, even as demand in key markets like Japan is falling. Australia alone is adding 4 Bcf/d of liquefaction capacity this year -- and will add another 2 Bcf/d in 2016, creating a 300 percent leap in the country's overall shipments in just three years.

This looks like a market that's going to be problematic for sellers for the foreseeable future (although great for buyers). Keep in mind when looking at any investments that hinge on LNG.

Here's to staying liquid,

Dave Forest

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Leave a comment
  • David on November 12 2015 said:
    This article would have been useful if it reported on "WHY" the change in LNG is happening and "IF" it was a short term or long term trend. I suspect that with Japan it is their change in policy to restart most of their Nuclear Plants. That could make the drop in LNG a long term issue. What changed with South Korea?
  • CENTURION on November 12 2015 said:
    He, the author, doesn't know "why".

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