An anticipated warmer winter in north Asia and Japan may be good for residents in these colder climates, but it’s starting to play havoc with LNG spot market prices and LNG shippers. The Japan Meteorological Agency and Australia’s Bureau of Meteorology said a few weeks ago there was a 70 percent chance of an El Nino weather pattern this year, which can result in unusually mild winters in the northern hemisphere.
Meanwhile, gas storage levels in Japan and South Korea are estimated to be at their highest since at least 2015, Reuters reported on Friday, citing traders and data from Refinitiv Eikon. Storage tanks are also filling up in China ahead of winter.
North Asia’s gas inventory typically peaks in October before significant drawdowns begin, but this year there are no signs yet of stocks falling. In fact, according to a source, at least one utility is already starting to offload unwanted winter cargoes on the spot market, which is already seeing prices for the super-chilled fuel fall to unseasonably low levels, a very pricing different scenario from just four or five months ago.
LNG spot prices in Asia spiked to four-year highs over the summer as buyers in North Asia competed for cargoes with Mexico and Egypt amid supply outages from global producers and as warmer temperatures in Asia persisted which spiked electricity demand from air conditioning usage. Production setbacks in the US, Australia and Malaysia also tightened supplies, while LNG trading volumes in Asia were also being supported by the restocking of depleted inventories by South Korean and Japanese utilities after an unseasonably cold winter. Spot prices for June delivery settled at $11.60/MMBtu – a massive increase in price for the fuel from the same month in the previous year which hovered just under $6/MMBtu. Related: Will U.S. Solar Survive The Trade War?
Now with storage levels full, December spot LNG LNG-AS was reportedly trading late last week at $10.20/MMBtu, the lowest since August 10. Not only have storage levels and an anticipated milder winter season put downward pressure on prices, Japan’s is also revamping is nuclear power generation sector.
After the Fukushima nuclear disaster in 2011, Japan subsequently shut down its 54 nuclear reactors, creating a supply crunch for LNG at the time with upward pressure on prices. By early 2014, LNG spot in Asia was fetching more than $20/MMBtu. Now, nine nuclear power reactors that were shut down in 2011 have received regulatory approval to restart, with seven of them already in operation, more than most analysts had expected.
Stranded LNG tankers
With storage levels in Japan, China and South Korea (the world’s three largest LNG importers) exceeding volumes seen in the previous three years for this time of the year, LNG tankers are also entering a rough patch. Related: It's All-Or-Nothing For Colorado Drillers
Six tankers carrying a million cubic meters of unsold LNG, worth $200 million-plus, have been sitting idle in Singapore, one of the world’s biggest trading hubs for the fuel, and in Malaysian waters for up to two weeks. In the past, shippers have parked their tankers close to ports like Singapore where unused ships can be easily maintained and serviced until new orders come in. For ship owners, idled tankers mean a loss in daily chartering fees per vessel. Through the first most of the year, LNG spot shipping rates hit a peak not seen since 2012, according to maritime research and consulting firm Drewry.
Shipowners with modern DFDE vessels chartered out their ships at $60,000 per day in the second quarter of 2018, which is about 50 percent higher than the rates seen in the third quarter of 2017, a report in World Maritime News said in August. At the end of June 2018, some vessels were reportedly fixed at $85,000 per day. LNG spot shipping rates also usually spike during peak winter season.
It remains to be seen whether the warmer weather forecast will prove true, but if it does pan out as predicted, LNG spot prices this winter, which often spike if utilities need to fill gaps in demand, could also reach unseasonably low prices. Moreover, if China also has a warmer winter, it will avoid a repeat of last year when the government rushed too quickly to replace dirtier burning coal with gas, leaving a gas shortage in many northern provinces, while the government was forced to divert gas from industrial end users to residential users.
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By Tim Daiss for Oilprice.com
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